SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
x
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
¨
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6157
Heller Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
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36-1208070
(I.R.S. Employer Identification No.)
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500 West Monroe
Street, Chicago, Illinois
(Address of principal executive offices)
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60661
(Zip Code)
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Registrants telephone number, including area code: (312)
441-7000
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class
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Name of Exchange on which
Registered
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Class A Common
Stock |
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New York Stock Exchange, Inc. |
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The Chicago Stock Exchange
Incorporated |
Cumulative Perpetual
Senior Preferred Stock, Series A |
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New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
ü
No
.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of
February 10, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrants Class A common stock, as reported on the New York Stock
Exchange was approximately $932,725,765.
Number of shares of Common Stock outstanding at February 10,
2000:
Class A Common Stock45,429,868
Class B Common Stock51,050,000
Documents incorporated by reference: Portions of the definitive Proxy
Statement prepared for the 2000 Annual Meeting of Stockholders to be filed
no later than April 2, 2000 are incorporated by reference into Part III of
this report.
Web site address is www.hellerfinancial.com
TABLE OF CONTENTS
The following discussion contains certain forward-looking
statements as defined in the Securities Exchange Act of 1934 which are
generally identified by the words anticipates, believes, estimates,
expects, plans, intends and other similar expressions. Those
statements are subject to certain risks, uncertainties and contingencies,
which could cause our actual results, performance or achievements to differ
materially from those expressed in, or implied by, such statements. See Item
7. Managements Discussion and Analysis of Financial Condition and
Results of OperationsSpecial Note Regarding Forward-Looking
Statements.
Heller Financial, Inc. (including its consolidated subsidiaries,
Heller or the Company, which may be referred to as we, us
or our) is a worldwide commercial finance company providing a
broad range of financing solutions to middle-market and small business
clients.
Primary Business Segments
We deliver our products and services principally through two business
segments:
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Domestic Commercial
Finance; and
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International Factoring
and Asset Based Finance.
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Domestic Business
Our Domestic Commercial Finance segment is made up of five business
units:
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(1)
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Corporate Finance,
providing collateralized cash flow and asset based lending;
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(2)
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Real Estate Finance,
primarily providing secured real estate financing;
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(3)
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Leasing Services,
providing debt and lease financing of small, medium and large ticket
equipment sourced directly or through manufacturers, distributors and
dealers;
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(4)
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Small Business Finance,
providing financing to small businesses, primarily under U.S. Small
Business Administration (SBA) loan programs; and
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(5)
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Healthcare Finance,
providing asset-based, collateralized cash flow and secured real estate
financing to healthcare service providers.
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International Business
Our International Factoring and Asset Based Finance segment, known as
Heller International Group (International Group), provides factoring
services and financings secured primarily by receivables, inventory and
equipment. It does so through wholly-owned subsidiaries and joint ventures
which provide financing to small and mid-sized companies primarily in
Europe, but also in Asia and Latin America.
Market Position
We concentrate primarily on senior secured lending, with 86% of
lending assets and investments at December 31, 1999 being made on that
basis. Also, to a more limited extent, we make subordinated loans and invest
in select debt and equity instruments.
We believe that, as of December 31, 1999, our subsidiary,
Factofrance-Heller (Factofrance), is the largest factoring operation
in France. We were named the #1 Small
Business Administration 7(a) lender nationwide based upon volume for the SBA
s 1999 fiscal year. We are among the largest lenders to private
equity-sponsored companies in the U.S. middle market. We believe we are the
leading provider of secured finance to small and mid-sized healthcare
companies. Additionally, we are a recognized leader in real estate finance,
vacation ownership lending, vendor finance and middle-market equipment
finance and leasing in the United States.
We have built our portfolio through:
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effective asset
origination capabilities;
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disciplined underwriting
and credit approval processes;
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effective portfolio
management; and
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Our business groups have the ability to manage asset, client,
industry and geographic concentrations and enhance profitability by
distributing assets through securitizations, syndications and loan
sales.
Heller History and Recent Activities
Heller was founded in 1919. From our inception, we have primarily
targeted our commercial financing activities at mid-sized and small
businesses in the United States. Since 1964, we have also competed in
selected international markets through our consolidated subsidiaries and
investments in international joint ventures.
Heller was purchased by a subsidiary of The Fuji Bank, Limited
(Fuji Bank) in 1984. Fuji Bank owned 100% of Hellers common
stock between that time and April 1998. In May 1998, we issued 38,525,000
shares of Class A Common Stock in an initial public offering (the IPO).
The IPO reduced Fuji Banks ownership, through its direct
subsidiary Fuji America Holdings, Inc. (FAHI), to 79% of the voting
interest and 57% of the economic interest of our issued common stock. Fuji
Banks ownership was further reduced to 77% of the voting interest and
52% of the economic interest when we issued approximately 7.3 million shares
of our Class A Common Stock in conjunction with our acquisition of
HealthCare Financial Partners, Inc. (HCFP) in July 1999. As a result
of such voting interest, FAHI has the unilateral power to elect all of the
members of our Board of Directors.
In May 1998, Heller increased its ownership of International Group to
100% from 79% by purchasing the 21% interest held by Fuji Bank.
From the time of Fuji Banks purchase of Heller through 1990, the
substantial majority of our portfolio consisted of Corporate Finance and
Real Estate Finance assets. Since 1990, we have diversified our portfolio.
While continuing to build our Corporate Finance and Real Estate Finance
franchises, we also invested significant resources in building other secured
lending businesses through start-ups of new business units, acquisitions and
the expansion of smaller existing operations. Products include asset based
working capital and term financings secured by accounts receivable and
inventory and various types of equipment finance and leasing product
offerings.
In the past several years, we selectively expanded our overseas
operations, most significantly by completing the acquisition, in April 1997,
of the interest of our joint venture partner in Factofrance, the leading
factoring company in France.
We further expanded our leasing operations in 1998 by acquiring
certain U.S. assets of the Dealer Products Group of Dana Commercial Credit
Corporation and the stock of the Dealer Products Groups international
subsidiaries (collectively, Dealer Products Group).
In July 1999, we believe we became the leading financing provider to
small and middle-market healthcare companies nationally by acquiring HCFP
and combining it with our existing healthcare finance
activities.
In August 1999, we opened our new Canadian subsidiary, Heller
Financial Canada, Ltd. which allows us to offer Canadian borrowers all of
the lending and leasing products we are able to offer our customers in the
U.S.
In December 1999, we completed the sale of the assets of our
Commercial Services business unit, part of our Domestic Commercial Finance
segment. We believe that long-term success in the domestic factoring
business would have required substantial economies of scale, which
Commercial Services would not have been able to achieve through internal
growth. We plan on using the capital and other resources made available from
this sale to increase our investment in our other business groups that, in
our opinion, offer greater opportunities for long-term growth and
profitability.
As the result of the above activities, we believe that we have built a
lending portfolio that is well diversified, has strong asset
collateralization and provides us with a consistent and diversified income
stream.
Summary 1999 Results
For the year ended December 31, 1999:
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Net income increased 47%
to $284 million, from $193 million for the prior year. This was our
seventh consecutive year of record earnings.
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Net income applicable to
common stock was $256 million for the year ended December 31, 1999, which
represented an increase of 49% from $172 million for the prior
year.
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Net income includes a
one-time after-tax gain of $48 million relating to the sale of assets of
our Commercial Services unit. Excluding this gain, net income was $236
million for the year, an increase of 22% over the prior year.
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New business volume
increased 12% over the prior year, from $7.2 billion to a record $8.1
billion.
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Total lending assets and
investments increased to $16.8 billion, an increase of $3.4 billion, or
25% from the prior year.
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Common stockholders
equity increased to $1.9 billion.
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Nonearning assets were
only $228 million, or 1.5% of total lending assets at December 31, 1999.
This is favorable to our targeted range for nonearning assets of
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2 to 4% of total lending
assets.
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Operating efficiency was
47.9% for 1999, a significant improvement from 1998, and in line with our
target of 48% for the year.
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See Note 23Operating Segmentsof our Consolidated
Financial Statements for disclosure regarding certain financial information
with respect to each of our business segments.
Domestic Commercial Finance Segment
Corporate Finance is a leading provider of secured financing solutions
to middle market oriented equity sponsors, intermediaries and enterprises.
Corporate Finance primarily offers:
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cash flow based
lending;
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asset based lending;
and
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on a more limited basis,
makes mezzanine and equity investments.
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Through Corporate Finance, we provide cash flow lending primarily for
corporate acquisitions, leveraged buyouts, recapitalizations, refinancings
and growth financing for publicly and privately held companies. These
companies are in a wide variety of industries, including manufacturing,
services, metals, plastics, consumer products and defense. In almost all
cases, these transactions involve professional or private equity investors
which acquire businesses for financial or strategic purposes.
We also provide secured term and revolving credit facilities with
durations averaging five to eight years. To a lesser extent, we provide
unsecured or subordinated financings and invest in limited partnership
funds. From time to time, we make modest non-voting equity investments in
conjunction with senior debt facilities, receive warrants or equity
interests as a result of providing financing and make stand-alone equity
co-investments with known equity sponsors. We also serve as co-lender or
participant in larger senior secured transactions originated by other
lenders.
We provide asset based working capital and term financing to
middle-market companies for corporate acquisitions, recapitalizations
refinancings, verifiable turnarounds, debtor-in-possession (DIP),
post-DIP transactions and growth financing. We do this through
revolvers, term loans and letters of credit supported by accounts
receivable, inventory, equipment and real estate. Middle market enterprises
we serve through our asset based lending unit include manufacturers,
retailers, wholesalers, distributors and service firms. We provide financing
both as an agent (lead lender) and as a co-lender or a participant in senior
secured transactions agented by other asset-based lenders.
We generate the majority of our new business through our relationships
with private equity sponsors, investment and commercial banks, accountants,
lawyers and a variety of brokers and other financial intermediaries. We have
developed and maintain close relationships with over 200 equity sponsors,
many of whom have been our clients for ten or more years and have financed
several transactions with us.
Our portfolio has loans in a wide range of industries including
industrial machinery, business services, metals, chemicals/plastics,
consumer products and automotive. The portfolio is diversified among
approximately 30 industries and no particular industry represented more than
10% of the portfolio.
The following table gives information about Corporate
Finance:
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As of, or For the Year
Ended,
December 31,
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1999
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1998
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1997
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(dollars in
millions) |
New business
volume |
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$3,130 |
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$2,607 |
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$2,065 |
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Total lending assets and
investments |
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4,937 |
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3,722 |
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3,066 |
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Revenues |
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471 |
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389 |
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361 |
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Revenues as a percentage
of total revenues |
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28.8 |
% |
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27.6 |
% |
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28.4 |
% |
Ratio of net writedowns to
average lending assets |
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0.5 |
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0.4 |
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0.8 |
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Ratio of nonearning assets
to lending assets |
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0.6 |
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0.4 |
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0.2 |
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The level of nonearning assets at December 31, 1999 of $29 million,
or 0.6% of Corporate Finance lending assets, indicates the high credit
quality of the portfolio. For the year ended December 31, 1999, Corporate
Finance had:
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net writedowns of only
0.5% of average lending assets; and
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total revenues of $471
million, or 29% of the Companys total revenues.
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As of December 31, 1999, Corporate Finance had total lending assets
and investments of $4.9 billion, or 29% of Hellers total lending and
investments. Of this amount:
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about $4.0 billion
represents cash flow financings; and
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about $900 million
represents asset based financings.
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We base our commitment to finance cash flow lending transactions on
our assessment of the borrowers ability to generate cash flows to
repay the loan. To do this, we consider, among other factors, the borrower
s:
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historical and projected
profitability;
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ability to withstand
competitive challenges; and
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relationships with clients
and suppliers.
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Cash flow based transactions are generally cross-collateralized and
secured by liens on the borrowers current and fixed assets and capital
stock.
Asset based lending transactions concentrate on balancing collateral
values, cash flow and capital structure. We protect against deterioration of
a borrowers performance by using established advance rates against
eligible collateral and cross-collateralizing revolving credit facilities
and term loans. We also actively manage credit risk through portfolio
diversification by industry and individual client exposure.
We manage the Corporate Finance portfolio centrally to ensure
consistent application of credit policy and efficient documentation and
approval of transaction modifications.
Corporate Finance has an established syndication capability. This
enables us to commit to larger transactions while still managing the
ultimate size of our retained position and to generate additional income. In
1999, we acted as agent for 52 private equity-sponsored syndicated
transactions. We believe this level of agented transactions makes us the
fifth largest syndicator of such deals in the United States. In 1999, we
syndicated a total of $1.5 billion in commitments. Although we can provide
commitments of up to $200 million per transaction, we generally syndicate
our ultimate retained position to $20 million or less. As of December 31,
1999, our average retained transaction size was approximately $18 million in
commitments and $10 million in fundings.
As of December 31, 1999, Corporate Finance had contractual commitments
to finance an additional $1.6 billion to new and existing borrowers,
generally contingent on their maintaining specific credit standards. Since
we expect many of these commitments to remain unused, the total commitment
amounts do not necessarily represent future cash requirements. We do not
have any significant commitments to provide additional financing related to
nonearning assets.
Real Estate Finance provides secured financing to owners, investors
and developers for the acquisition, refinancing and renovation of commercial
income producing properties in a
wide range of property types and geographic areas. We serve these markets by
offering tailored senior secured debt and junior participating structures
and by originating fixed rate commercial mortgages which we may securitize
in the future (CMBS). We also purchase interests in syndicated debt
and selected CMBS bonds. We believe we are the third largest lender to the
U.S. vacation ownership industry, providing timeshare resort developers with
full life-cycle financing secured by time share receivables and unsold real
estate inventory.
Our transactions are secured by a variety of property types
including:
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manufactured housing
communities;
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affordable housing
properties;
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self storage facilities;
and
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hotels and vacation
ownership units.
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Senior secured loan transactions range in size from $4 million to $25
million, with an average transaction size in 1999 of about $10 million.
Typical junior secured loan transactions range in size from $1 million to
$12 million, with an average transaction size in 1999 of about $4 million.
Typical vacation ownership transactions range in size from $5 million to $40
million, with an average transaction size in 1999 of about $15
million.
Real Estate Finance has 9 offices throughout the United States and one
office in Toronto. Origination efforts are focused predominantly on domestic
U.S. borrowers and, to a lesser degree, Canadian and Mexican borrowers. We
generate new business through our relationships with real estate brokers and
through direct calling on prospective borrowers. We market our products
through the use of trade advertising, direct marketing, newsletters and
trade show attendance and sponsorship.
The following table gives information about Real Estate
Finance:
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As of, or For the Year
Ended,
December 31,
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1999
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1998
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1997
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(dollars in
millions) |
New business
volume |
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$1,422 |
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$1,964 |
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$1,667 |
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Total lending assets and
investments |
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2,626 |
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1,889 |
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2,323 |
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Revenues |
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221 |
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250 |
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274 |
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Revenues as a percentage
of total revenues |
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13.5 |
% |
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17.8 |
% |
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21.6 |
% |
Ratio of net writedowns to
average lending assets |
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0.1 |
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2.9 |
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Ratio of nonearning assets
to lending assets |
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1.0 |
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0.5 |
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0.3 |
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As of December 31, 1999, Real Estate Finance had total lending assets
and investments of $2.6 billion, or 15.6% of Hellers total lending
assets and investments. Of this amount:
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about $1.2 billion
represents senior secured lending assets and investments;
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about $800 million
represents CMBS receivables;
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about $400 million
represents vacation ownership lending assets and investments
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Real Estate Finance new business volume for the year totaled $1.4
billion, of which approximately $400 million related to CMBS receivables.
New business volume was down from 1998 due to an anticipated decline in CMBS
volume. Excluding CMBS, new business volume for the year was approximately
$1 billion, an increase of $744 million or 276% over 1998. This growth in
non-CMBS volume resulted in an increase in Real Estate lending assets and
investments of over $700 million in 1999. We are continuing to provide
financing in the CMBS market and may sell or securitize existing and newly
originated CMBS assets depending on market conditions.
Net writedowns to average lending assets improved to 0.1% during 1999
versus 2.9% in 1998. Excluding a $40 million writedown recorded on CMBS
assets in 1998, the ratio of net writedowns to average lending assets was
0.3% for Real Estate Finance during 1998.
Total revenues of Real Estate Finance decreased during 1999 as
compared to 1998 primarily due to lower securitization income and lower net
investment gains.
Real Estate Finances credit philosophy emphasizes selecting
properties that generate stable or increasing income cash flow streams, have
strong asset quality and proven sponsorship with defined business plans. We
underwrite the CMBS product according to rating agency guidelines and we
make all CMBS loans on a senior secured basis. Vacation Ownerships
credit philosophy considers the developers business objectives and
capital needs, the competitive position of the resort development, mortgage
servicing capabilities, receivable performance and the developers
financial strength and timeshare experience. Our credit philosophy for
junior secured financings considers the strength and track record of the
property developer, the supply and demand dynamics of the particular market
and the competitive strengths of the subject real estate.
These credit strategies have resulted in low levels of nonearning
assets for the past three years. Our lending and investment philosophy
emphasizes portfolio liquidity, relatively small individual transaction
sizes and maintenance of a diverse portfolio in terms of geographic location
and property type.
Real Estate Finances lending assets and investments were
distributed as follows:
Property Types
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1999
|
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1998
|
General purpose office
buildings |
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27 |
% |
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15 |
% |
Retail
properties |
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18 |
|
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13 |
|
Apartments |
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14 |
|
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15 |
|
Vacation ownership
units |
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14 |
|
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14 |
|
Industrial
properties |
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7 |
|
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5 |
|
Hotels |
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6 |
|
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6 |
|
Manufactured
housing |
|
5 |
|
|
7 |
|
Self storage
facilities |
|
3 |
|
|
5 |
|
Senior housing |
|
2 |
|
|
8 |
|
Loan Portfolios |
|
1 |
|
|
2 |
|
Other |
|
3 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
100 |
% |
|
|
|
|
|
|
|
Geographic Areas
|
|
1999
|
|
1998
|
Southwest |
|
17 |
% |
|
21 |
% |
California |
|
17 |
|
|
19 |
|
Florida |
|
10 |
|
|
12 |
|
Southeast |
|
8 |
|
|
8 |
|
Midwest |
|
7 |
|
|
8 |
|
Mid-Atlantic
States |
|
6 |
|
|
4 |
|
West |
|
5 |
|
|
7 |
|
New England |
|
5 |
|
|
6 |
|
New York |
|
4 |
|
|
3 |
|
Other |
|
21 |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
During 1999, we securitized approximately $400 million of CMBS
receivables in the second quarter. We recognized $4 million of
securitization income on this transaction. We did not retain any residual
risk from this securitization as all of the commercial mortgage pass-through
certificates were sold to third parties on a non-recourse basis.
In addition to securitizations, we participate 50% of most of our
junior participation originations through an arrangement with institutional
investors in which they participate, in the aggregate, in 50% of qualified
transactions. Transactions originated outside of this
arrangement may be syndicated as well based on size or concentration
considerations. The use of syndications has enabled us to reduce our average
individual retained position in this portfolio to approximately $2
million.
At December 31, 1999, Real Estate Finance maintained contractual
commitments to finance an additional $289 million to new and existing
borrowers, generally contingent upon their maintaining specific credit
standards. Since we expect many of these commitments to remain unused, the
total commitment amounts do not necessarily represent future cash
requirements. We do not have any significant commitments to provide
additional financing related to nonearning assets.
Leasing Services is made up of three distinct business
units:
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(1)
|
Global Vendor Finance,
which provides financing programs domestically and in important overseas
markets for manufacturers and their channel partners;
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(2)
|
Commercial Equipment
Finance, which provides loans and lease financing to leading middle market
companies and experienced operators of proven franchise concepts;
and
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(3)
|
Capital Finance, which
provides financing and leasing for industry specific assets through direct
investments, joint ventures and institutional partnerships.
|
Global Vendor Finance. We formed Global
Vendor Finance in 1998 by combining our existing Vendor Finance unit with
the Dealer Products Groups technology leasing business acquired on
November 30, 1998. Primary locations for vendor leasing are the United
States, United Kingdom and Canada with smaller operations in continental
Europe, Mexico, Hong Kong and Singapore.
Global Vendor Finance provides customized sales financing programs
that enable vendors and manufacturers in commercial, industrial, medical and
information and technology markets to offer financing and leasing options to
their customers. The primary products we offer are true leases, loans and
conditional sales contracts. These financing programs may be offered on
either a direct, private label or joint venture basis. The primary equipment
types we finance are computer equipment, software, machine tool equipment,
plastics equipment, graphic arts equipment and transportation equipment.
Individual transaction sizes within these programs range from $1,000 to $10
million and terms generally range from 24 months to eight years.
In 1999, Global Vendor Finance generated approximately $1.2 billion in
new business volume, an increase of 53% over 1998 new business volume of
nearly $800 million. This increase was primarily due to our 1998 acquisition
of the Dealer Products Group.
Commercial Equipment Finance. Commercial
Equipment Finance has broad, national access to the equipment finance
marketplace through 13 domestic offices. We provide general equipment term
loan and lease financings directly to a diverse group of middle market
companies. They use the financings for:
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|
turnkey land, building and
equipment financing;
|
|
|
replacement or
modernization of equipment; and
|
|
|
refinancing of existing
equipment obligations.
|
We believe that our emphasis on direct origination provides us with a
competitive advantage of stronger customer relationships and enables us to
generate repeat business.
In 1999, we launched the Franchise Finance unit, a specialty group
within Commercial Equipment, to expand and focus our existing efforts to
meet the financing needs of strong, experienced operators of proven
franchise concepts. This unit reinforces our historical commitment to
franchise lending.
The Special Purpose Property unit was also launched in 1999. This new
specialty group combines our asset based lending expertise with our
traditional equipment and real estate financing to provide one financing
source for real property and equipment. The Special Purpose Property unit
provides secured debt and synthetic lease products for end-user and
owner-occupied properties to middle market companies in a wide variety of
industries.
In addition to direct origination, we generate business through
traditional broker and other intermediary channels. Through our broad market
access, we also generate new business referrals for other business groups of
the Company, particularly Corporate Finance and Small Business Finance.
Individual transaction sizes range from $1 million to $40 million. A typical
borrower/lessee is a U.S. business with annual revenues of at least $35
million. Generally, the equipment serving as collateral for the financing is
essential to the operations of the borrower and the amount financed is
generally not a substantial part of the borrowers capital structure.
Commercial Equipment Finance generated new business volume of nearly $800
million in 1999, an increase of 26% over 1998.
Capital Finance. Capital Finance offers
customized equipment financing solutions, including operating leases and
other specialized financing alternatives. The group focuses its origination
efforts in large ticket markets and sectors such as:
|
|
selected telecommunication
markets;
|
|
|
selected transportation
markets; and
|
|
|
selected technology
markets
|
Our Aircraft Finance unit within Capital Finance is a niche competitor
in the commercial aircraft and aircraft engine finance industries and
provides financing through operating leases and senior and junior secured
loans on both new and used equipment. Our clients are typically mid-tier
foreign or domestic airlines. We have developed a reputation for
responsiveness on single investor transactions, which generally involve one
aircraft with lease terms of three to seven years. In addition, our
reliability and industry knowledge have made us a frequently desired
participant in larger financings by other aircraft lessors. With our
industry and equipment expertise, we are able to effectively shift our
product offering mix during various phases of the equipment cycle and to
re-market off-lease equipment. Typical transaction sizes range from $3
million to $50 million.
Similar to our Aircraft Finance unit, Capital Finance transactions
provide financing through:
|
|
acquisition of seasoned
leveraged leases;
|
|
|
residual participations;
and
|
|
|
other strategic
partnerships or investments.
|
Capital Finance generated new business volume of $311 million in 1999,
35% of which related to Aircraft Finance. This level of new business volume
represented a 35% increase over 1998.
The following table sets forth certain information regarding Leasing
Services:
|
|
As of, or For the Year
Ended,
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
New business
volume |
|
$2,298 |
|
|
$1,634 |
|
|
$1,646 |
|
Total lending assets and
investments |
|
3,428 |
|
|
2,840 |
|
|
2,314 |
|
Revenues |
|
341 |
|
|
231 |
|
|
195 |
|
|
|
Revenues as a percentage
of total revenues |
|
20.8 |
% |
|
16.4 |
% |
|
15.4 |
% |
Ratio of net writedowns to
average lending assets |
|
0.5 |
|
|
0.1 |
|
|
0.1 |
|
Ratio of nonearning assets
to lending assets |
|
0.9 |
|
|
1.0 |
|
|
0.7 |
|
The ratio of net writedowns to average lending assets of 0.5% for 1999
and 0.1% for 1998, and the low ratio of nonearning assets to lending assets
of 1.0% or lower for each of the past three years, demonstrate the strong
credit quality of the Leasing Services portfolio.
Global Vendor Finances approach to lending balances the strength
of the borrower, the value of the underlying collateral and the extent of
recourse provided by the vendor. Middle and large ticket leasing
transactions are characterized by the high credit quality performance of the
portfolio as evidenced by lower levels of nonearning assets and writedowns
with equivalently lower yields. Small ticket leasing transactions have
higher margins but also have correspondingly higher levels of writedowns and
non-earning assets.
Commercial Equipment Finances approach to lending concentrates
on the cash flow of the borrower, the importance and/or value of the
equipment to the borrowers overall operations and the relative
strength of the borrowers balance sheet and capital
structure.
Capital Finances credit approach focuses on the strength of the
underlying collateral and the creditworthiness of the underlying
lessee.
In all areas, Leasing Services assesses residual value risk and
effectively manages off-lease equipment exposures. Designated individuals in
each equipment unit establish all equipment residuals used in pricing lease
transactions. They continuously research secondary market values to
establish current values, estimate future values and mark industry
trends.
Leasing Services distributes a portion of its assets through
securitizations and syndications. During 1999, Leasing Services securitized
approximately $800 million in two securitizations resulting in net gains of
$9 million. Through these capital markets capabilities, we are able to
provide broader market coverage and better service to clients, while
managing borrower and industry concentrations.
As of December 31, 1999, Leasing Services lending assets and
investments totaled $3.4 billion, or 20% of Hellers total lending
assets and investments.
The Leasing Services portfolio consisted of 31 industry
classifications at December 31, 1999. The computer industry represented 22%
of Leasing Services total lending assets while the automotive industry
represented 15%. No other industry represented more than 10% of total
lending assets for Leasing Services at December 31, 1999.
At December 31, 1999, Leasing Services maintained contractual
commitments to finance an additional $557 million to new and existing
borrowers, generally contingent upon their maintaining specific credit
standards. Since we expect many of these commitments to remain unused, the
total commitment amounts do not necessarily represent future cash
requirements. We do not have any significant commitments to provide
additional financing related to nonearning assets.
Small Business Finance provides long-term financing to small
businesses primarily in the manufacturing, retail and service sectors
for:
|
|
facility purchases,
construction or refinancing;
|
|
|
business or equipment
acquisition;
|
Our major product offerings are SBA 7(a) loans, which are guaranteed
up to 80% by the SBA, and SBA 504 loans, which are senior to an accompanying
SBA loan and have an average loan to collateral value of 50%. We also
originate transactions without credit support from the SBA.
Small Business Finance is one of only fourteen non-banks that the SBA
licenses to make SBA 7(a) loans. In 1999, we became the largest national
originator of such loans in the United States in terms of volume. Our
portfolio is 77% concentrated in California, Texas, Florida and Illinois,
and is geographically diversified within these states. We have diversified
our portfolio by industry type, with concentrations of 15% in transportation
services and 11% in miscellaneous consumer services at December 31, 1999. No
other industry represented more than 10% of our portfolio.
Small Business Finance loans are generally for amounts up to $4
million, have an average size of approximately $500,000 and have a
contractual maturity ranging from five to 25 years. Our $1.3 billion in
lending assets and investments as of December 31, 1999, represented 7.8% of
the Companys portfolio. At December 31, 1999, 79% of our portfolio was
originated under SBA lending programs.
The following table gives certain information regarding Small Business
Finance:
|
|
As of, or For the Year
Ended, |
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
|
New business
volume |
|
$703 |
|
|
$547 |
|
|
$472 |
|
Total lending assets and
investments |
|
1,312 |
|
|
1,013 |
|
|
766 |
|
Revenues |
|
120 |
|
|
98 |
|
|
64 |
|
|
|
Revenues as a percentage
of total revenues |
|
7.3 |
% |
|
7.0 |
% |
|
5.0 |
% |
Ratio of net writedowns to
average lending assets |
|
0.5 |
|
|
0.4 |
|
|
0.3 |
|
Ratio of nonearning assets
to lending assets |
|
3.3 |
|
|
3.3 |
|
|
2.0 |
|
New business volume of Small Business Finance totaled over $700
million and represented a 29% increase from the prior year.
Small Business Finance operates out of 32 offices in 16 states. Our
portfolio is managed on a centralized basis. We focus our marketing efforts
on developing relationships with third party intermediaries, such as real
estate brokers, mortgage brokers and business brokers. We originate
additional business through referrals from existing customers, franchisers,
targeted direct marketing and cross-referrals from Hellers other
business units.
We maintain SBA Preferred Lender Program (PLP) status that enables us
to approve SBA 7(a) loans under SBA-delegated approval authority. Small
Business Finance has maintained a position as one of the nations three
largest originators of SBA 7(a) loans since 1995.
We have standardized our underwriting and procedural guidelines to
ensure a consistent and efficient lending process. We base our credit
decisions on the analysis of a prospective borrowers cash flow, the
use of independent valuations for collateral and a review of management.
Loans are generally secured by real estate and equipment, with additional
collateral in the form of other business assets, personal residences and, in
many instances, personal guarantees.
Our Small Business Finance portfolio consists of approximately 3,800
individual loans, providing diversified risk. At December 31, 1999,
nonearning assets represented 3.3% of this portfolio. Of our nonearning
assets, approximately 76% were the guaranteed portions of SBA 7(a) loans
which are held until a liquidation is complete and the SBA repurchases the
loan. Net writedowns have remained at or below 0.5% of average lending
assets for each of the past three years.
We have developed and demonstrated the ability to sell both the
guaranteed and unguaranteed portions of SBA 7(a) loans in the secondary
market. We sold $221 million in guaranteed SBA 7(a) loans in 1999 resulting
in income of $17 million.
At December 31, 1999, Small Business Finance maintained contractual
commitments to finance an additional $44 million to new and existing
borrowers, generally contingent upon their maintaining specific credit
standards. We do not have any significant commitments to provide additional
financing related to nonearning assets.
Healthcare Finance was formed when we acquired HCFP in July 1999.
Subsequent to the acquisition, we combined our existing healthcare finance
activities in cash flow, asset based and real estate lending with those of
HCFP and believe we became the leading financing provider to small and
middle-market healthcare companies nationally.
Healthcare Finance offers asset-based, collateralized cash flow and
secured real estate financing to healthcare providers, with a primary focus
on clients operating in sub-markets of the healthcare industry, including
long-term care, home healthcare, physician practices, pharmacies, mental
health providers and durable medical equipment suppliers. We provide
financing to our clients through i) revolving lines of credit secured by,
and advances against, accounts receivable, and ii) term loans secured by
real estate, accounts receivable or other assets. Our clients use our
products to address their working capital needs and to finance healthcare
facility acquisitions and expansions.
Healthcare Finance targets small and middle-market healthcare
providers with financing needs in the $100,000 to $30 million range in
healthcare sub-markets. The average asset based lending transaction size in
1999 was about $4 million.
Healthcare Finance has developed low cost means of marketing its
services on a nationwide basis to selected healthcare sub-markets.
Healthcare Finance primarily markets its services by telemarketing to
prospective clients, advertising in industry specific periodicals and
participating in industry trade shows. To a lesser extent, Healthcare
Finance markets its services by developing referral relationships with
accountants, lawyers, venture capital firms, billing and collecting firms
and investment banks.
The following table gives information about Healthcare
Finance:
|
|
As of, or For the Year
Ended,
December 31,
|
|
|
1999(1)
|
|
1998(1)
|
|
1997
|
|
|
(dollars in
millions) |
New business
volume |
|
$362 |
|
|
$250 |
|
|
N/A |
Total lending assets and
investments |
|
971 |
|
|
217 |
|
|
N/A |
Revenues |
|
63 |
|
|
14 |
|
|
N/A |
|
|
Revenues as a percentage
of total revenues |
|
3.8 |
% |
|
1.0 |
% |
|
N/A |
Ratio of net writedowns to
average lending assets |
|
|
|
|
|
|
|
N/A |
Ratio of nonearning assets
to lending assets |
|
0.7 |
|
|
|
|
|
N/A |
(1)
|
Includes existing
healthcare activities of Real Estate Finance and Corporate
Finance.
|
As of December 31, 1999, Healthcare Finance had total lending assets
and investments of nearly $1 billion, or 5.8% of Hellers total lending
assets and investments. Healthcare Finance new business volume for the year
totaled $362 million, of which $145 million related to HCFP since the
acquisition date.
Healthcare Finance provides financing based upon our analysis of the
prospective clients financial condition and strategic position,
including a review of all available financial statements and other financial
information, legal documentation and operational matters. Our assessment
also includes a detailed examination of a prospective clients accounts
receivable, accounts payable, billing and collection systems and procedures,
management information systems and real and personal property and other
collateral.
As of December 31, 1999, Healthcare Finance had contractual
commitments to finance an additional $44 million to new and existing
borrowers, generally contingent on their maintaining specific credit
standards. We do not have any significant commitments to provide additional
financing related to nonearning assets.
International Factoring and Asset Based Finance Segment
International Group, the Heller subsidiary that manages the
International Factoring and Asset Based Financing business, is active in the
following product areas:
|
|
working capital
finance;
|
|
|
factoring and receivables
management services;
|
|
|
leasing and vendor
financing; and
|
International Group has a significant presence in factoring and
asset based financing, primarily in Europe. We have had subsidiaries and
joint ventures in many international markets for more than 30 years. Direct
holdings of International Group currently consists of five consolidated
subsidiaries and 10 joint ventures. These subsidiaries and joint ventures
operate in 20 countries in Europe, Asia/Pacific and Latin
America.
The largest of our consolidated subsidiaries is Factofrance, which is
the leading factoring company in France and the second largest factor in the
world. In 1999, Factofrance had factoring volume of $12 billion.
Factofrances traditional clients are small to mid-sized,
high-growth companies that utilize factoring to finance their working
capital needs. Factofrance offers a full range of both domestic and
international factoring services, including financing, credit insurance and
management and collection of accounts receivables.
Factofrance utilizes a credit scoring system and a rating system for
making credit decisions. The scoring system involves many criteria including
company size, industry, selected financial information and ratio analysis.
In addition to the scoring system, a rating system is used for requests for
credit lines above specified limits. The rating system is used to authorize
credit limits for individual and global lines of credit. Credit approval
decisions are made by analysts, credit managers or by committee according to
delegated authorities.
Factofrance is re-insured by a third-party insurer for customer credit
lines above specified limits. This credit insurance enables Factofrance to
more effectively manage credit exposures. Insured risks require the approval
of the insurance provider and are insured at either a 50% or 80% level,
depending on the size of the risk.
To expand its client base, Factofrance has actively pursued a
partnering strategy to focus on particular market niches as well as to
provide access to the client bases of large banking partners. Two of these
arrangements with French banking partners are unconsolidated joint ventures.
Factofrance provides services to these joint ventures and bills the joint
ventures for those services. On a combined basis, these unconsolidated joint
ventures generated $6 billion in factoring volume in 1999, which is in
addition to the consolidated factoring volume shown above.
In addition to its Paris headquarters, Factofrance has seven regional
sales offices, which market its services and cover local networks of
business referral sources from brokers or banks. In recent years, the direct
marketing approach has gained in importance and is now the main source of
business for Factofrance. The company engages in press and television
advertisement to increase brand awareness and support direct marketing
efforts.
Factofrances consolidated receivables were FRF 15.7 billion (or
$2.4 billion) at the end of 1999. The companys receivables portfolio
is well diversified both in terms of exposure to specific industries and
individual customers, with no individual sector representing more than 10%
of the total. In addition, the company has very effective control procedures
in place to manage its risks, whether client or customer
related.
The average maturity of Factofrances assets is about 70 days.
Factofrance seeks to match this with short-term funding, essentially in the
form of interbank borrowings and domestic commercial paper. In addition,
Factofrance has access to Bank of France (central bank) funding based on
certain eligible receivables. The company has approximately FRF 2.0 billion
(or $307 million) in stand-by credit lines. In 1998 Factofrance set up a
securitization program for approximately FRF 1.0 billion (or $188 million)
in order to diversify its funding sources and enhance liquidity.
We believe that our International Group subsidiaries and joint
ventures provide a solid base for consistent growth in international
earnings. They also provide us with the opportunity to meet the
international financing needs of Hellers domestic client base. At
December 31, 1999, International Group had total lending assets and
investments of over $3.0 billion, or 18.1% of Hellers total lending
assets and investments. In 1999, we had total revenues (including Heller
s share of net income from international joint ventures) of $265
million, or 16.2% of Hellers total revenues.
The following table provides certain information regarding the
International Factoring and Asset Based Financing segment:
|
|
As of, or For the Year
Ended, December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
|
Lending assets and
investments of consolidated
subsidiaries: |
France (1) |
|
$ 2,410 |
|
|
$ 2,143 |
|
|
$1,850 |
|
Other Europe |
|
22 |
|
|
19 |
|
|
10 |
|
Asia/Pacific |
|
189 |
|
|
194 |
|
|
223 |
|
Latin America (2) |
|
204 |
|
|
74 |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,825 |
|
|
2,430 |
|
|
2,163 |
|
Investments in
international joint ventures: |
|
|
|
|
|
|
|
|
|
Europe |
|
187 |
|
|
194 |
|
|
160 |
|
Asia/Pacific |
|
17 |
|
|
16 |
|
|
16 |
|
Latin America (2) |
|
11 |
|
|
21 |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
215 |
|
|
231 |
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$ 3,040 |
|
|
$ 2,661 |
|
|
$2,361 |
|
|
|
|
|
|
|
|
|
|
|
Factoring volume of
consolidated subsidiaries: |
|
|
|
|
|
|
|
|
|
France (1) |
|
$12,014 |
|
|
$10,684 |
|
|
$6,238 |
|
Asia/Pacific |
|
623 |
|
|
573 |
|
|
280 |
|
Latin America (2) |
|
936 |
|
|
346 |
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$13,573 |
|
|
$11,603 |
|
|
$6,677 |
|
|
|
|
|
|
|
|
|
|
|
Revenues of consolidated
subsidiaries: |
|
|
|
|
|
|
|
|
|
France (1) |
|
$ 182 |
|
|
$ 183 |
|
|
$ 121 |
|
Other Europe |
|
5 |
|
|
2 |
|
|
|
|
Asia/Pacific |
|
18 |
|
|
21 |
|
|
25 |
|
Latin America (2) |
|
26 |
|
|
8 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
214 |
|
|
151 |
|
Income of international
joint ventures: |
|
|
|
|
|
|
|
|
|
Europe |
|
36 |
|
|
30 |
|
|
32 |
|
Asia/Pacific |
|
1 |
|
|
|
|
|
1 |
|
Latin America (2) |
|
(3 |
) |
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
30 |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
Total international revenues |
|
$ 265 |
|
|
$ 244 |
|
|
$ 187 |
|
|
|
|
|
|
|
|
|
|
|
Total international
revenues as a percentage
of total revenues |
|
16.2 |
% |
|
17.3 |
% |
|
14.7 |
% |
Ratio of net writedowns to
average lending assets |
|
0.1 |
|
|
0.2 |
|
|
1.8 |
|
Ratio of nonearning assets
to lending assets |
|
1.2 |
|
|
1.1 |
|
|
0.9 |
|
(1)
|
Reflects the consolidation
of Factofrance in April 1997 due to the acquisition of the interest of
International Groups joint venture partner, which increased
International Groups ownership of Factofrance from 48.8% to
97.6%.
|
(2)
|
Reflects the consolidation
of Heller Sud Servicios Financieros due to our obtaining economic control
of this Argentina subsidiary.
|
The largest of our joint ventures is NMB-Heller Holding N.V., which
operates in 8 countries, primarily Holland, the United Kingdom and Germany.
NMB-Heller Holding N.V. accounted for 59% of our investments in
international joint ventures at December 31, 1999.
Our investment in NMB-Heller Holding N.V. totaled $129 million and
$131 million at December 31, 1999 and 1998, respectively. NMB-Heller Holding
N.V. had total receivables of $2.9 billion and $2.8 billion at December 31,
1999 and 1998, respectively, and revenues of $181 million and $180 million
for the years then ended.
We continue to develop our international operations through mergers,
joint ventures and acquisitions. We have broad, worldwide access to
mid-sized and small businesses with operations in 20 countries outside the
United States. Each of our subsidiaries and joint ventures operates
independently, with its own well-developed methods of originating business.
The majority of our international joint ventures are self-financed. We
manage our investments through offices located in London, Singapore and
Chicago. Each subsidiary and joint venture has its own well-developed credit
philosophy, risk management policies and procedures and portfolio management
processes. We monitor our subsidiaries and joint ventures through
participation on their boards of directors, credit committees and other
executive and administrative bodies.
See Note 26Subsequent Eventsfor information on the
sale of our interest in our Belgium operating companies that occurred in
February 2000.
Our marketing efforts include reinforcing our national brand building
marketing campaign, Straight Talk, Smart Deals, in the
marketplace.
Heller originates transactions in the United States utilizing a
dedicated sales force of over 300 employees throughout our 48 domestic
office locations. We originate transactions internationally through a
network of wholly-owned subsidiaries and joint venture commercial finance
companies in 20 countries outside the United States. Our sales people have
industry-specific experience that enables them to effectively structure
commercial finance transactions to companies in the industries and markets
we serve.
Our sales force originates business through a combination
of:
|
|
relationships with a wide
variety of private equity investors, business brokers, investment bankers,
and various intermediaries and referral sources;
|
|
|
relationships with
manufacturers, dealers and distributors;
|
|
|
direct calling on
prospective borrowers;
|
|
|
relationships with
financial institutions; and
|
|
|
relationships with
web-based customers.
|
We have invested in expanding and broadening our market coverage in
several of our businesses, particularly Small Business Finance, Leasing
Services and Healthcare Finance. We expect these investments to enhance our
ability to generate new transactions and revenue growth.
We design the structure of our sales force compensation to
encourage:
|
|
profitable new business
development;
|
|
|
solid pricing margins;
and
|
|
|
cross-referral of business
opportunities to other business groups.
|
Our CrossLink Program, which compensates sales force members
and other employees for the generation of cross-referral business volume,
has been enhanced and has built momentum for cross-referral activities.
During 1999, CrossLink produced commitments of nearly $300
million.
We also market our products and services through the use
of:
|
|
general market
advertising;
|
|
|
trade show attendance and
sponsorship;
|
|
|
presenting educational
seminars; and
|
|
|
a variety of other market
and industry-specific events.
|
We maintain several proprietary databases for the purpose of
generating targeted, customized direct marketing campaigns and for tracking
relationship history with certain clients and prospects. We regularly
conduct client satisfaction surveys and other market research studies
designed to assess our competitive position and to identify unfulfilled
needs of our clients and prospects.
We are developing and expanding our eCommerce capabilities in
an effort to realize new business opportunities and processing efficiences,
including:
|
|
new origination
channels;
|
|
|
new products and
services;
|
|
|
greater geographic
penetration;
|
|
|
internet based alliances
and partnerships;
|
|
|
increased automation of
loan application and credit approval processes;
|
|
|
self-service (customers
and employees); and
|
|
|
rapid response to market
demands and changes.
|
We have registered a number of domestic and foreign domain names that
we are using, or may use in the future, in connection with our eCommerce
strategy, the two most important of which are hellerfin.com and
hellerfinancial.com.
Hellers markets are highly fragmented and extremely competitive.
They are characterized by competitive factors that vary by product and
geographic region. Our competitors include:
|
|
other commercial finance
companies;
|
|
|
national and regional
banks and thrift institutions;
|
|
|
investment companies;
and
|
|
|
manufacturers and
vendors.
|
Competition from both traditional competitors and new market entrants
has intensified in recent years as the result of an improving economy,
growing marketplace liquidity and an increasing recognition of the
attractiveness of the commercial finance markets. Also, the growth of the
securitization markets has reduced the difficulty of accessing capital for
some market participants. This is further intensifying competition in
certain market segments.
We compete primarily on the basis of pricing, terms, structure and
service. Our competitors often seek to compete aggressively on the basis of
these factors. We may lose market share to the extent we are unwilling to
match our competitors pricing, terms or structure in order to maintain
our spreads or to maintain our credit discipline. To the extent that we
match competitors pricing, terms or structure, we may experience
decreased spreads and/or increased risk of credit losses. Many of our
competitors are large companies that have substantial capital, technological
and marketing resources. Some of these competitors are larger than Heller
and may have access to capital at a lower cost than we do. Further, the size
and access to capital of certain of our competitors are being enhanced by
the recent surge in consolidation activity in the commercial and investment
banking industries. Also, our competitors include businesses that are not
affiliated with bank holding companies and therefore are not subject to the
same extensive federal regulations that govern bank holding companies and
their subsidiaries. As a result, such non-banking competitors may engage in
certain activities in which we are currently prohibited from
engaging.
Fuji Bank is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 and is registered as such with the Board of
Governors of the Federal Reserve System. As a result, we are subject to the
Bank Holding Company Act and are subject to examination by the Federal
Reserve.
In general, the Bank Holding Company Act limits the activities in
which we may engage to those the Federal Reserve has generally determined to
be so closely related to banking . . . as to be a proper incident
thereto. The Bank Holding Company Act generally requires the approval
of the Federal Reserve before we may engage in such activities. To obtain
the Federal Reserves approval, Fuji Bank must submit a notice that
provides information both about the proposed activity or acquisition and
about the financial condition and operations of Fuji Bank and Heller. The
Bank Holding Company Act will continue to apply to the Company for as long
as Fuji Bank holds 25% or more of any class of our voting stock or otherwise
is deemed by the Federal Reserve to control our management or operations.
Our current business activities either constitute permitted activities or
have received the Federal Reserves express approval.
Fuji Bank, as a Japanese bank, is also required to comply with the
Japanese Banking Law. During 1998, the Banking Law was amended. The Banking
Law limits the type of
subsidiaries in which a Japanese bank may invest to those that conduct
eligible businesses. A subsidiary is defined as an entity in
which there is ownership of more than 50% of the voting shares. Eligible
businesses generally include banks, securities firms, insurance companies,
administrative businesses and financial companies. Establishment of any
subsidiary requires the prior approval of the Financial Supervisory Agency,
an agency of the Prime Ministers Office. Non-eligible business
investments are permitted if acquired as collateral, although disposition of
such businesses is required within one year.
Heller intends to use its best efforts to cooperate with Fuji Bank in
Fuji Banks compliance with the new statute, provided that such
cooperation would not, in the judgment of Hellers management,
materially and adversely affect Hellers business operations. We do not
believe that our cooperation has had or will have a material adverse effect
on our current business operations or on the achievement of our intended
business and financial goals.
SBA loans that we originate are governed by the Small Business Act and
the Small Business Investment Act of 1958, as amended, and may be subject to
the same regulations by certain states as are other commercial finance
operations. The federal statutes and regulations specify the types of loans
and loan amounts which are eligible for the SBAs guaranty as well as
the servicing requirements imposed on the lender to maintain SBA
guarantees.
Our operations are subject, in certain instances, to supervision and
regulation by state and federal governmental authorities. They may also be
subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other
things:
|
|
regulate credit granting
activities;
|
|
|
establish maximum interest
rates, finance charges and other charges;
|
|
|
require disclosures to
customers;
|
|
|
govern secured
transactions; and
|
|
|
set collection,
foreclosure, repossession and claims handling procedures and other trade
practices.
|
Although most states do not regulate commercial finance, certain
states impose limitations on interest rates and other charges and on certain
collection practices and creditor remedies. They may also require licensing
of lenders and financiers and adequate disclosure of certain contract terms.
We are also required to comply with certain provisions of the Equal Credit
Opportunity Act applicable to commercial loans. Additionally, we are subject
to regulation in those countries in which we have operations and in most
cases have been required to obtain central governmental approval before
commencing business.
In the judgment of management, the above and other existing statutes
and regulations have not had a material adverse effect on our business.
However, it is not possible to forecast the nature of future domestic or
foreign legislation, regulations, judicial decisions, orders or
interpretations nor their impact upon our future business, financial
condition, results of operations or prospects.
As of December 31, 1999, Heller had 2,695 employees. We are not
subject to any collective bargaining agreements.
During 1999, Heller implemented its Employer of Choice
initiative in an effort to gain recognition by its competitors, clients
and employees as an exceptional employeran industry and market leader
in attracting, developing and retaining employees.
Hellers business activities contain elements of risk. We
consider the principal types of risk across the enterprise to
be:
|
|
asset/liability risk
(including market risk exposures to changes in interest rates and foreign
exchange rates as well as liquidity risk); and
|
We consider the proper management of risk, across the enterprise,
essential to conducting our business and to maintaining profitability.
Accordingly, we have designed our risk management systems and procedures to
identify and analyze our risks. We have set appropriate policies and limits
to continually monitor these risks and limits by means of administrative and
information systems and other policies and programs.
We manage credit risk through:
|
|
underwriting
procedures;
|
|
|
centralized approval of
individual transactions; and
|
|
|
active portfolio and
account management.
|
We have developed underwriting procedures for each business line that
enable us to assess a prospective borrowers ability to perform in
accordance with established loan terms. These procedures
include:
|
|
analyzing business or
property cash flows and collateral values;
|
|
|
performing financial
sensitivity analyses; and
|
|
|
assessing potential exit
strategies.
|
For transactions we originate with the intent of reducing our ultimate
retained asset size, we assign a risk rating prior to approval of the
underlying transaction that reflects our confidence level, prior to funding,
in syndicating the proposed transaction. Each business unit has a Senior
Credit Officer who reports directly to our Chief Credit Officer and who
reviews and approves financing and restructuring transactions that exceed
designated amounts. Larger transactions require approval of our Chief Credit
Officer or his deputy or a centralized credit committee comprised of our
Chairman, Chief Operating Officer, Chief Credit Officer and Chief Financial
Officer. Our Chief Credit Officer and, in some cases, our Chairman, conducts
a quarterly portfolio review of each business groups significant
assets.
We manage our portfolio by monitoring transaction sizes as well as
diversification according to:
Through these practices, management identifies and limits exposure to
unfavorable risks and seeks favorable financing opportunities. We use (1)
loan grading systems to monitor the performance of loans by product category
and (2) an overall risk classification system to monitor the risk
characteristics of the total portfolio. These systems generally
consider:
|
|
the relationship of the
loan to underlying business or collateral value;
|
|
|
industry
characteristics;
|
|
|
principal and interest
risk; and
|
|
|
credit enhancements such
as guarantees, irrevocable letters of credit and recourse
provisions.
|
When an account experiences financial difficulties, professionals who
specialize in managing workout situations are brought in to more closely
monitor the account and formulate strategies to optimize and accelerate the
resolution process. An independent loan review function performs reviews to
validate the loan grading of assets and provides its findings to senior
management and to our Boards Audit Committee. Our Internal Audit
Department (IAD), which is independent of operations, performs
reviews of credit management and operation processes. IAD also reports its
findings to senior management and our Boards Audit
Committee.
|
Asset/Liability Management
|
We actively measure and quantify (1) interest rate risk, (2) foreign
exchange risk and (3) liquidity risk resulting from normal business
operations and derivatives hedging activity. We use derivatives as an
integral part of our asset/liability management program. We use these
derivatives to:
|
|
diversify sources of
funding;
|
|
|
alter interest rate
exposure arising from mismatches between assets and liabilities;
and
|
|
|
manage exposure to
fluctuations in foreign exchange rates.
|
We are not an interest rate swap dealer nor are we a trader in
derivatives. We do not use derivative products for the purpose of generating
earnings from changes in market conditions.
Before entering into a derivative transaction, we determine that a
high correlation exists between the change in value of a hedged item and the
value of the derivative. When we execute each transaction, we designate the
derivative to specific assets, pools of assets or liabilities. After the
inception of a hedge transaction, our asset/liability managers monitor the
effectiveness of derivatives through an ongoing review of the amounts and
maturities of
assets, liabilities and swap positions. They report this information to our
Financial Risk Management Committee (the FRMC), whose members include
our Chairman, Chief Operating Officer, Chief Credit Officer, Chief Financial
Officer and Treasurer. The FRMC determines the direction we will take with
respect to our financial risk position and regularly reviews interest rate
sensitivity, foreign exchange exposures, funding needs and liquidity. We
regularly report these positions and the related FRMC activities to the
Board of Directors and our Boards Executive Committee.
Interest Rate Risk Management. We regularly
measure and quantify our sensitivity to changes in interest rates in terms
of our two primary risks of potential loss: (1) basis risk and (2) mismatch
risk. Basis risk is the exposure created from the use of different interest
rate indices to re-price assets versus liabilities, such as prime based
assets funded with commercial paper liabilities. Mismatch risk is the
exposure created from the re-pricing or maturity characteristics of on and
off-balance sheet assets versus the re-pricing or maturity characteristics
of on and off-balance sheet liabilities.
We use various sensitivity analysis models to measure our exposure to
increases or decreases in interest rates on net income. We perform these
analyses to ensure that our exposure to any significant adverse effect of
change in interest rates is limited to that approved by the Board of
Directors and the FRMC. The FRMC reviews the results of these models
monthly.
Assuming our balance sheet and off-balance sheet positions were to
remain constant and no actions were taken to alter the existing interest
rate sensitivity at December 31, 1999 and 1998, a hypothetical immediate 100
basis point parallel shift in yield curves would have affected net income by
less than 0.4% and 1.0%, respectively, over a six month horizon.
Additionally, if our balance sheet and off-balance sheet positions
were to remain constant and no actions were taken to alter the existing
prime/commercial paper exposure existing at December 31, 1999 and 1998, a 30
basis point compression in the existing basis would have altered net income
by approximately 1.3% and 1.3% over a twelve month horizon.
We believe that the above interest rate sensitivity analyses comply
with the SECs Quantitative Disclosure Rules About Market Risk.
We revised our disclosure alternative for 1999 from the tabular format in
1998 in an effort to streamline our disclosures and to present more
practical information to our readers. We have provided interest rate
sensitivity analyses for 1998 for comparative purposes.
Certain limitations are inherent in the above income simulation
models. The models assume that changes in interest rates are reflected
uniformly across all yield curves. The models do not adjust for potential
changes in credit quality, size and balance sheet composition or other
business developments over the period being measured which could affect net
income. Although our models provide an indication of our sensitivity to
interest rate changes at a particular point in time, we can give no
assurances that actual results would not differ materially from the
potential outcomes simulated.
Interest rate swaps are our primary tool for financial risk
management. These instruments enable us to match more closely the interest
rate and maturity characteristics of our assets and liabilities. As such, we
use interest rate swaps to:
|
|
change the characteristics
of fixed rate debt to that of variable rate debt;
|
|
|
alter the characteristics
of specific fixed rate asset pools to more closely match the interest rate
terms of the underlying financing; and
|
|
|
modify the variable rate
basis of a liability to more closely match the variable rate basis used
for variable rate receivables.
|
At December 31, 1999, we had over $10 billion in notional amount of
interest rate swap and basis swap agreements with commercial banks and
investment banking firms.
We also utilize interest rate futures to hedge the interest rate risk
of a portion of our receivables portfolio. At December 31, 1999 we held
10-year interest rate futures contracts with an equivalent notional amount
of $220 million.
Hellers underlying business activities remain unchanged from
1998 and are not expected to substantially change in 2000. Interest rate
risk remains a primary market risk exposure that we will continue to manage.
We may utilize certain other types of instruments, in addition to interest
rate swaps and futures, to hedge interest rate risk in 2000.
Foreign Exchange Risk Management. We invest in
and operate commercial finance companies throughout the world. Over the
course of time, reported results from our operations and investments in
foreign countries may fluctuate in response to exchange rate movements in
the U.S. dollar. While our Western European operations and investments
represent our largest areas of activity, reported results will be influenced
to a lesser extent by the exchange rate movements in the currencies of
certain countries in Asia and Latin America where our subsidiaries and
investments are located.
In order to minimize the effect of fluctuations in foreign currency
exchange rates on our financial results, we periodically enter into forward
currency exchange contracts, cross currency swap agreements or enter into
currency options or currency option combinations. These financial
instruments serve as hedges of our foreign investment in international
subsidiaries and joint ventures or effectively hedge the translation of the
related foreign currency income. We held $1.4 billion in notional amount of
forward currency exchange contracts and $470 million in notional amount of
cross currency swap agreements at December 31, 1999. Included in the cross
currency interest rate swap agreements were $306 million used to hedge debt
instruments issued in foreign currencies at December 31, 1999. Through these
contracts, we effectively sell the local currency and buy U.S. dollars. We
also periodically enter into forward contracts to hedge receivables
denominated in foreign currencies or purchase foreign currencies in the spot
market to settle a foreign currency denominated liability.
Hellers exposure to foreign exchange risk has increased somewhat
since 1997 due to the Dealer Products Group acquisition, since we now
have additional operations in certain foreign countries. Foreign exchange
risk remains a primary market risk exposure that we will continue to manage.
We have not altered the way in which we hedge our foreign exchange risk nor
do we anticipate any significant changes in 2000. Our implementation of
Financial Accounting Standard No. 133, Accounting for Derivatives and
Hedging Activities, may however, impact our use of certain foreign
currency hedging instruments in 2000.
We use a Value-at-Risk (VAR) methodology to evaluate the impact
of foreign currency exchange fluctuations on net income. VAR is a
measurement of the potential company-wide loss in earnings from adverse
market movements over a specified period of time with a selected likelihood
of occurrence. Our model measures the aggregate sensitivity to all changes
in foreign currency exchange rates to which we are exposed. The FRMC reviews
the results of this model monthly.
We have employed a variance/co-variance approach to measure VAR.
This approach seeks to quantify market volatility by using historical
changes in foreign currency exchange rates to measure the probability of
future changes in foreign exchange rates. Variance/covariance also uses
correlation statistics to measure how different currencies move in relation
to one another. Our VAR analysis calculates the potential after-tax earnings
at risk associated with changes in foreign currency exchange rates, within a
95% confidence level, over a twelve-month horizon. Based on our analysis
using a 95% confidence level, it is expected that as of December 31, 1999
and 1998, foreign exchange rate movements would reduce after-tax earnings by
less than $1 million and $2 million, respectively, over a twelve-month
horizon. The high and low VAR amounts during the year ended December 31,
1999 ranged from $1.7 million to $45,000. The high and low VAR amounts
during the year ended December 31, 1998 ranged from $2.1 million to
$113,000.
We believe that the above VAR analyses comply with the SECs
Quantitative Disclosure Rules About Market Risk. We revised our
disclosure alternative for 1999 from the tabular format in 1998 in an effort
to streamline our disclosures and to present more practical information to
our readers. We have provided VAR analyses for 1998 for comparative
purposes.
Liquidity Risk Management. We manage liquidity
risk primarily by:
|
(1)
|
monitoring the relative
maturities of assets and liabilities;
|
|
(2)
|
borrowing funds through
the U.S. and international money and capital markets and bank credit
markets; and
|
|
(3)
|
ensuring the availability
of substantial sources of liquidity such as unused committed bank
lines.
|
We use cash to fund asset growth and to meet debt obligations and
other commitments on a timely and cost-effective basis. Our primary sources
of funds are:
|
(1)
|
commercial paper
borrowings;
|
|
(2)
|
issuances of medium-term
notes and other term debt securities; and
|
|
(3)
|
the syndication,
securitization or sale of certain lending assets.
|
At December 31, 1999, commercial paper and short-term borrowings were
$5.2 billion and amounts due on term debt within one year were $2.8 billion.
If we are unable to access such markets at acceptable terms, we could draw
on our bank credit and asset sale facilities and use cash flow from
operations and portfolio liquidations to satisfy our liquidity needs. At
December 31, 1999, we had committed available liquidity support through our
bank credit and asset sale facilities totaling $5.7 billion representing, on
a consolidated basis, 110% of outstanding commercial paper and short-term
borrowings. We believe that such credit lines should provide us with
sufficient liquidity under foreseeable conditions. See also Item 7.
Managements Discussion and Analysis of Financial Condition and Results
of OperationsLiquidity and Capital Resources for further
information concerning our liquidity.
|
Operational Risk Management
|
Operational risk is the risk of potential losses due to business risk,
event risk or organizational risk.
We have recently adopted an Enterprise Risk Management (ERM)
approach to enhance our measurement, reporting and monitoring of all risks,
including operational risk. ERM
involves an organizational structure in which each business has an operational
risk manager responsible for the identification, measurement, monitoring and
reporting of credit, market and operational risk. These risks are then
aggregated and monitored, on a company wide basis, by a separate unit led by
the Operational Risk Officer who reports to the Audit Committee of our Board
of Directors.
The continued strong credit quality of our portfolio in 1999 reflected
our credit strategies, underwriting, portfolio management and disciplined
credit approval processes. As of December 31, 1999, nonearning assets were
$228 million, or 1.5% of lending assets, versus $211 million, or 1.8% of
lending assets, at the end of 1998. We remain favorable to our stated target
range for nonearning assets of 24% of lending assets. In addition, our
allowance for losses of receivables was in excess of 100% of nonearning
impaired receivables as of December 31, 1999, 1998 and 1997. The following
table presents information about the credit quality of our
portfolio:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Lending Assets and
Investments: |
|
|
|
|
|
|
|
|
|
Receivables |
|
$14,795 |
|
|
$11,854 |
|
|
$10,722 |
|
Repossessed assets |
|
24 |
|
|
3 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Total lending assets |
|
14,819 |
|
|
11,857 |
|
|
10,736 |
|
Equity and real estate investments |
|
737 |
|
|
617 |
|
|
488 |
|
Debt securities |
|
549 |
|
|
400 |
|
|
311 |
|
Operating leases |
|
508 |
|
|
321 |
|
|
195 |
|
Investments in international joint
ventures |
|
219 |
|
|
235 |
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$16,832 |
|
|
$13,430 |
|
|
$11,928 |
|
|
|
|
|
|
|
|
|
|
|
Nonearning
Assets: |
|
|
|
|
|
|
|
|
|
Impaired receivables |
|
$ 204 |
|
|
$ 208 |
|
|
$ 141 |
|
Repossessed assets |
|
24 |
|
|
3 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Total nonearning assets |
|
$ 228 |
|
|
$ 211 |
|
|
$ 155 |
|
|
|
|
|
|
|
|
|
|
|
Ratio of nonearning impaired receivables to
receivables |
|
1.4 |
% |
|
1.8 |
% |
|
1.3 |
% |
Ratio of total nonearning assets to total lending
assets |
|
1.5 |
% |
|
1.8 |
% |
|
1.4 |
% |
Allowances for
Losses: |
|
|
|
|
|
|
|
|
|
Allowance for losses of receivables |
|
$ 316 |
|
|
$ 271 |
|
|
$ 261 |
|
Ratio of allowance for losses of receivables to
receivables |
|
2.1 |
% |
|
2.3 |
% |
|
2.4 |
% |
Ratio of allowances for losses of receivables to
net writedowns |
|
3.2 |
x |
|
3.3 |
x |
|
1.8 |
x |
Ratio of allowance for losses of receivables to
nonearning impaired receivables |
|
154.9 |
% |
|
130.3 |
% |
|
185.1 |
% |
Delinquencies: |
|
|
|
|
|
|
|
|
|
Earning loans delinquent 60 days or
more |
|
$ 228 |
|
|
$ 184 |
|
|
$ 151 |
|
Ratio of earning loans delinquent 60 days or more
to receivables |
|
1.5 |
% |
|
1.6 |
% |
|
1.4 |
% |
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
|
Net Writedowns of
Lending Assets: |
Net writedowns on receivables |
|
$ 98 |
|
|
$ 81 |
|
|
$139 |
|
Net writedowns on repossessed assets |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Total net writedowns |
|
$ 98 |
|
|
$ 81 |
|
|
$146 |
|
|
|
|
|
|
|
|
|
|
|
Ratio of net writedowns to average lending
assets |
|
0.7 |
% |
|
0.7 |
% |
|
1.5 |
% |
Nonearning Assets. We classify
receivables as nonearning when we have significant doubt about the ability
of the debtor to meet current contractual terms. This may be evidenced by
(1) loan delinquency, (2) reduction of cash flows, (3) deterioration in the
loan to value relationship and (4) other relevant considerations. The table
below shows nonearning assets by business line in 1999, 1998 and
1997:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Domestic Commercial
Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Finance |
|
$ 29 |
|
13 |
% |
|
$ 13 |
|
6 |
% |
|
$ 7 |
|
5 |
% |
Real Estate Finance |
|
21 |
|
9 |
|
|
8 |
|
4 |
|
|
5 |
|
3 |
|
Leasing Services |
|
25 |
|
11 |
|
|
25 |
|
12 |
|
|
14 |
|
9 |
|
Small Business Finance |
|
43 |
|
19 |
|
|
33 |
|
16 |
|
|
16 |
|
10 |
|
Healthcare Finance |
|
7 |
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Commercial Services |
|
|
|
|
|
|
5 |
|
2 |
|
|
2 |
|
1 |
|
Other |
|
71 |
|
31 |
|
|
101 |
|
48 |
|
|
92 |
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Domestic Commercial
Finance |
|
196 |
|
86 |
|
|
185 |
|
88 |
|
|
136 |
|
87 |
|
International Factoring
and Asset Based Finance |
|
32 |
|
14 |
|
|
26 |
|
12 |
|
|
19 |
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets. |
|
$228 |
|
100 |
% |
|
$211 |
|
100 |
% |
|
$155 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets as of December 31, 1999 were 1.5% of total lending
assets, an improvement from 1.8% as of the prior year and favorable to our
targeted range of 2% to 4%. Other nonearning assets consist of transactions
for business activities we are no longer pursuing.
Allowance for Losses. The
allowance for losses of receivables is a general reserve available to absorb
losses in the entire portfolio. We establish this allowance through direct
charges to income. Losses are charged to the allowance when we deem all or a
portion of a receivable uncollectible. We review the allowance periodically
and we adjust it when appropriate given:
|
|
the size and loss
experience of the overall portfolio;
|
|
|
the effect of current
economic conditions; and
|
|
|
the collectibility and
workout potential of identified risk and nonearning accounts. For
repossessed assets, if the fair value declines after the time of
repossession, we record a writedown to reflect this reduction in
value.
|
Our allowance for losses of receivables totaled $316 million, or 2.1%
of receivables, at December 31, 1999 versus $271 million, or 2.3% of
receivables, at December 31, 1998. The decrease as a percentage of
receivables is consistent with the strong credit performance of our
portfolio. The ratio of allowance for losses of receivables to nonearning
impaired receivables exceeded 100% at December 31, 1999, 1998 and
1997.
Delinquent Earning Accounts and Loan Modifications.
Earning accounts 60 days or greater past due totaled
$228 million, or 1.5% of receivables at December 31, 1999 compared to $184
million or 1.6% at December 31, 1998. The level of delinquent earning
accounts changes between periods based on the timing of payments and the
effects of changes in general economic conditions on our borrowers. Troubled
debt restructurings were $14 million at December 31, 1999 and at December
31, 1998.
At December 31, 1999, there were no loans that were restructured and
returned to earning status.
Writedowns. Net writedowns,
shown below for the years ended December 31, 1999, 1998 and 1997, increased
in 1999 from 1998 as lower net writedowns in Real Estate Finance were offset
by significantly higher recoveries in the Other category during 1998. This
category represents transactions for business activities we are no longer
pursuing.
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Net Writedowns of Lending
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Commercial Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Finance |
|
$22 |
|
22 |
% |
|
$14 |
|
|
17 |
% |
|
$ 25 |
|
17 |
% |
Real Estate Finance |
|
2 |
|
2 |
|
|
45 |
|
|
55 |
|
|
1 |
|
1 |
|
Leasing Services |
|
14 |
|
15 |
|
|
3 |
|
|
4 |
|
|
1 |
|
1 |
|
Small Business Finance |
|
6 |
|
6 |
|
|
3 |
|
|
4 |
|
|
2 |
|
1 |
|
Healthcare Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Services |
|
16 |
|
17 |
|
|
13 |
|
|
16 |
|
|
8 |
|
5 |
|
Other |
|
35 |
|
35 |
|
|
(2 |
) |
|
(2 |
) |
|
87 |
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Domestic Commercial Finance |
|
95 |
|
97 |
|
|
76 |
|
|
94 |
|
|
124 |
|
85 |
|
International Factoring and Asset Based
Finance |
|
3 |
|
3 |
|
|
5 |
|
|
6 |
|
|
22 |
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net
writedowns |
|
$98 |
|
100 |
% |
|
$81 |
|
|
100 |
% |
|
$146 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net writedowns for 1999 totaled $98 million or 0.7% of average lending
assets, compared to $81 million or 0.7% for the same period in 1998. Gross
writedowns totaled $116 million for 1999, compared to $145 million in the
prior year, while gross recoveries totaled $18 million in 1999 compared to
$64 million in 1998. The increase in Real Estate Finance net writedowns
during 1998 was the result of the $40 million writedown on CMBS assets
recorded in the fourth quarter of that year.
During 1999, we recorded net writedowns of $35 million on our Other
portfolio, as compared with net recoveries of $2 million in 1998. This is
the result of realizing higher levels of recoveries in 1998 on this
portfolio which represents assets from activities we are no longer pursuing.
The increase in Leasing Services net writedowns during 1999 is primarily due
to the Dealer Products Group acquisition that occurred in November
1998.
We lease office space for our corporate headquarters at 500 West
Monroe Street, Chicago, Illinois 60661. We lease other offices throughout
the United States, Canada, Europe, Asia/Pacific and Latin America. For
information concerning our lease obligations, see Note 11 to the
Consolidated Financial Statements. We own an office building used by Leasing
Services in the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of our business. We believe
that the amounts, if any, which we may ultimately pay regarding these
matters will not have a material adverse effect on our business, financial
condition or results of operations. However, we have no assurance that an
unfavorable decision in any such legal proceeding would not have a material
adverse effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Heller
in the fourth quarter of 1999.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Hellers Class A Common Stock has traded on the New York and
Chicago Stock Exchanges, under the symbol HF, since our initial
public offering in May 1998. The following tables summarize the high and low
market prices as reported on the New York Stock Exchange Composite Tape for
the periods indicated and the cash dividends declared during 1999 and
1998:
|
|
Sales Price Range
of Common Stock
|
|
|
1999
|
|
1998
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
Quarters: |
|
|
|
|
|
|
|
|
First |
|
$30.31 |
|
$22.63 |
|
N/A |
|
N/A |
Second |
|
31.19 |
|
23.31 |
|
$30.82 |
|
$26.50 |
Third |
|
28.00 |
|
20.75 |
|
30.75 |
|
19.75 |
Fourth |
|
25.63 |
|
18.63 |
|
29.13 |
|
17.00 |
|
|
Dividends Declared
on Common Stock
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
Quarters: |
|
|
|
|
First |
|
$ 8 |
|
$ 465 |
Second |
|
8 |
|
533 |
Third |
|
8 |
|
|
Fourth |
|
10 |
|
8 |
|
|
|
|
|
Total dividends paid |
|
$34 |
|
$1,006 |
|
|
|
|
|
In 1999, we declared and paid cash dividends of $34 million on our
Common Stock. During the fourth quarter of 1999, we increased the quarterly
dividend on each share of our Class A and Class B Common Stock to $0.10 per
share from $0.09 per share, an increase of 11%.
In 1998, we declared and paid cash dividends of over $1 billion on our
Common Stock. These dividends included $998 million paid on the Common Stock
owned by FAHI, both before and after the IPO. This amount included a $450
million dividend paid in February 1998 in the form of a subordinated note,
which we subsequently repaid, and cash dividends in the first and second
quarters of 1998 of $15 million and $533 million, respectively.
During the first quarter of 2000, we declared and paid dividends
ratably on our Class A and Class B Common Stock of $0.10 per
share.
We are prohibited from paying dividends on Common Stock
unless:
|
(1)
|
we have paid all declared
dividends on all of our outstanding shares of Preferred Stock, Series C
and Series D; and
|
|
(2)
|
we have paid all full
cumulative dividends on all outstanding shares of our Cumulative Perpetual
Senior Preferred Stock, Series A.
|
All such preferred stock dividends have been paid to date.
As of February 10, 2000, there were approximately 833 holders of
record of Hellers Class A Common Stock, one of which represents
approximately 7,185 beneficial holders. FAHI is the sole record holder of
Hellers Class B Common Stock. The closing price of the Class A Common
Stock on February 10, 2000 was $20.44.
ITEM 6. SELECTED FINANCIAL DATA
The results of our operations and balance sheet data for each of the
years in the three-year period ended December 31, 1999 and as of December
31, 1999 and 1998, respectively, were derived from our audited Consolidated
Financial Statements, and the notes thereto, which appear elsewhere in this
Form 10-K. The results of operations and balance sheet data for each of the
years in the two-year period ended December 31, 1996 and as of December 31,
1997, 1996 and 1995, respectively, were derived from our audited
consolidated financial statements, and the notes thereto, which are not
presented herein. The data presented below should be read in conjunction
with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial
Statements, and the notes thereto, appearing elsewhere in this Form
10-K.
|
|
For the Year Ended
December 31,
|
|
|
1999(1)(2)
(3)(4)
|
|
1998(3)(4)
|
|
1997(4)
|
|
1996
|
|
1995
|
|
|
(in
millions) |
Results of
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ 1,197 |
|
|
$ 1,047 |
|
|
$ 924 |
|
|
$ 807 |
|
|
$ 851 |
|
Interest
expense |
|
685 |
|
|
624 |
|
|
516 |
|
|
452 |
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
512 |
|
|
423 |
|
|
408 |
|
|
355 |
|
|
387 |
|
Fees and other
income |
|
286 |
|
|
206 |
|
|
206 |
|
|
79 |
|
|
148 |
|
Factoring
commissions |
|
119 |
|
|
124 |
|
|
104 |
|
|
55 |
|
|
50 |
|
Income of international
joint ventures |
|
35 |
|
|
30 |
|
|
36 |
|
|
44 |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
952 |
|
|
783 |
|
|
754 |
|
|
533 |
|
|
620 |
|
Operating
expenses |
|
456 |
|
|
399 |
|
|
357 |
|
|
247 |
|
|
216 |
|
Provision for
losses |
|
136 |
|
|
77 |
|
|
164 |
|
|
103 |
|
|
223 |
|
Gain on sale of HCS
assets |
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charge |
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority
interest |
|
439 |
|
|
290 |
|
|
233 |
|
|
183 |
|
|
181 |
|
Income tax
provision |
|
154 |
|
|
93 |
|
|
66 |
|
|
43 |
|
|
49 |
|
Minority
interest |
|
1 |
|
|
4 |
|
|
9 |
|
|
7 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ 284 |
|
|
$ 193 |
|
|
$ 158 |
|
|
$ 133 |
|
|
$ 125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
$
28 |
|
|
$
21 |
|
|
$
14 |
|
|
$
10 |
|
|
$
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ 256 |
|
|
$ 172 |
|
|
$ 144 |
|
|
$ 123 |
|
|
$ 115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
1999(3)(4)
|
|
1998(3)(4)
|
|
1997(4)
|
|
1996
|
|
1995
|
|
|
(in
millions) |
Balance Sheet
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
$14,795 |
|
|
$11,854 |
|
|
$10,722 |
|
|
$ 8,529 |
|
|
$ 8,085 |
|
Allowance for losses of
receivables |
|
(316 |
) |
|
(271 |
) |
|
(261 |
) |
|
(225 |
) |
|
(229 |
) |
Equity and real estate
investments |
|
737 |
|
|
617 |
|
|
488 |
|
|
419 |
|
|
428 |
|
Debt securities |
|
549 |
|
|
400 |
|
|
311 |
|
|
251 |
|
|
152 |
|
Operating
leases |
|
508 |
|
|
321 |
|
|
195 |
|
|
135 |
|
|
113 |
|
Investment in
international joint ventures |
|
219 |
|
|
235 |
|
|
198 |
|
|
272 |
|
|
233 |
|
Total assets |
|
17,973 |
|
|
14,366 |
|
|
12,861 |
|
|
9,926 |
|
|
9,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and
short-term borrowings |
|
5,202 |
|
|
3,681 |
|
|
3,432 |
|
|
2,745 |
|
|
2,223 |
|
Long-term debt |
|
8,630 |
|
|
6,768 |
|
|
6,004 |
|
|
4,761 |
|
|
5,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$13,832 |
|
|
$10,449 |
|
|
$ 9,436 |
|
|
$ 7,506 |
|
|
$ 7,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$15,615 |
|
|
$12,394 |
|
|
$11,096 |
|
|
$ 8,402 |
|
|
$ 8,208 |
|
Preferred stock |
|
400 |
|
|
400 |
|
|
275 |
|
|
125 |
|
|
125 |
|
Common equity |
|
1,947 |
|
|
1,562 |
|
|
1,403 |
|
|
1,342 |
|
|
1,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ 2,347 |
|
|
$ 1,962 |
|
|
$ 1,678 |
|
|
$ 1,467 |
|
|
$ 1,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of, or For the Year
Ended, December 31,
|
|
|
1999(1)(2)
(3)(4)
|
|
1998(3)(4)
|
|
1997(4)
|
|
1996
|
|
1995
|
|
|
(dollars in
millions) |
Selected Data and
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a percentage of
AFE(5) |
|
3.8 |
% |
|
3.6 |
% |
|
4.0 |
% |
|
4.1 |
% |
|
4.6 |
% |
Non-interest operating revenues as a percentage of
AFE(5) |
|
3.2 |
|
|
3.0 |
|
|
3.5 |
|
|
2.0 |
|
|
2.7 |
|
Operating revenues as a percentage of
AFE(5) |
|
7.0 |
|
|
6.6 |
|
|
7.5 |
|
|
6.1 |
|
|
7.3 |
|
Return on average common stockholders
equity(6) |
|
14.9 |
|
|
12.4 |
|
|
10.5 |
|
|
9.4 |
|
|
9.3 |
|
Return on average common stockholders
equity, net of HCS gain (6) |
|
12.1 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Return on AFE(5) |
|
2.1 |
|
|
1.6 |
|
|
1.6 |
|
|
1.5 |
|
|
1.5 |
|
Ratio of earnings to combined fixed charges and
preferred stock
dividends(7) |
|
1.53 |
x |
|
1.39 |
x |
|
1.39 |
x |
|
1.36 |
x |
|
1.34 |
x |
Salaries and general operating expenses as a
percentage of AFE(5) |
|
3.3 |
% |
|
3.4 |
% |
|
3.5 |
% |
|
2.8 |
% |
|
2.6 |
% |
Ratio of operating expenses to operating
revenues |
|
47.9 |
|
|
51.0 |
|
|
47.3 |
|
|
46.3 |
|
|
34.8 |
|
Common dividend payout ratio(8) |
|
13.3 |
|
|
13.4 |
|
|
47.7 |
|
|
47.2 |
|
|
47.0 |
|
Credit
Quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earning loans delinquent 60 days or more
to receivables |
|
1.5 |
% |
|
1.6 |
% |
|
1.4 |
% |
|
1.7 |
% |
|
1.4 |
% |
Ratio of net writedowns to average lending
assets |
|
0.7 |
|
|
0.7 |
|
|
1.5 |
|
|
1.3 |
|
|
2.9 |
|
Ratio of total nonearning assets to total lending
assets |
|
1.5 |
|
|
1.8 |
|
|
1.4 |
|
|
3.3 |
|
|
3.6 |
|
Ratio of allowance for losses of receivables to
receivables |
|
2.1 |
|
|
2.3 |
|
|
2.4 |
|
|
2.6 |
|
|
2.8 |
|
Ratio of allowance for losses of receivables to
net writedowns |
|
3.2 |
x |
|
3.3 |
x |
|
1.8 |
x |
|
2.1 |
x |
|
1.0 |
x |
Ratio of allowance for losses of receivables to
nonearning impaired
receivables |
|
154.9 |
% |
|
130.2 |
% |
|
185.1 |
% |
|
85.2 |
% |
|
87.7 |
% |
Leverage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of debt (net of short-term investments) to
total stockholders equity |
|
5.8 |
x |
|
5.2 |
x |
|
5.2 |
x |
|
5.0 |
x |
|
5.0 |
x |
Ratio of commercial paper and short-term
borrowings to total debt |
|
37.6 |
% |
|
35.2 |
% |
|
36.4 |
% |
|
36.6 |
% |
|
30.2 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments(9) |
|
$16,832 |
|
|
$13,430 |
|
|
$11,928 |
|
|
$9,620 |
|
|
$9,039 |
|
Average lending assets |
|
13,235 |
|
|
11,506 |
|
|
9,702 |
|
|
8,293 |
|
|
8,052 |
|
Funds employed(5) |
|
15,839 |
|
|
11,989 |
|
|
10,673 |
|
|
9,030 |
|
|
8,542 |
|
Average funds employed(5) |
|
13,636 |
|
|
11,814 |
|
|
10,081 |
|
|
8,727 |
|
|
8,466 |
|
Total managed assets(10) |
|
17,202 |
|
|
13,664 |
|
|
11,800 |
|
|
9,574 |
|
|
9,137 |
|
Average managed assets(10) |
|
14,963 |
|
|
13,007 |
|
|
10,687 |
|
|
9,356 |
|
|
8,776 |
|
Number of employees |
|
2,695 |
|
|
2,714 |
|
|
2,339 |
|
|
1,527 |
|
|
1,487 |
|
Number of office locations |
|
70 |
|
|
76 |
|
|
63 |
|
|
52 |
|
|
36 |
|
(1)
|
The financial data
presented for 1999 reflects our purchase of HCFP in July 1999. As a result
of this purchase, we consolidated the acquired assets as of the date of
acquisition. Goodwill related to the acquisition totaled approximately
$235 million. The consolidation of HCFP resulted in an increase of
approximately $535 million in total lending assets and investments and 134
additional employees as of December 31, 1999. This acquisition had a
favorable impact on our 1999 net income.
|
(2)
|
On December 1, 1999, we
sold the net assets of our Commercial Services unit. The sale consisted of
$911 million of factored accounts receivable and the assumption of $577
million of liabilities due to factoring clients. We recognized an
after-tax gain on the transaction of $48 million.
|
(3)
|
The financial data
presented for 1999 and 1998 reflects our purchase of the domestic
technology leasing assets of the Dealer Products Group and the stock of
the Dealer Products Groups international subsidiaries in November
1998. As a result of this purchase, we consolidated the acquired assets
and international subsidiaries of the Dealer Products Group as of the date
of acquisition. Goodwill related to this acquisition totaled $190 million.
The consolidation of the Dealer Products Group assets and subsidiaries
resulted in an increase of approximately $625 million in total assets and
approximately 400 additional employees as of December 31, 1998 as compared
to December 31, 1997. This acquisition had a minimal favorable impact on
our 1998 net income, as our 1998 results include only one month of Dealer
Products Group operations.
|
(4)
|
The financial data
presented for 1999, 1998 and 1997 reflects our purchase (through our
subsidiary, International Group) of our joint venture partners
interest in Factofrance in April 1997 for $174 million. As a result of
this purchase, Factofrance was reported on a consolidated basis with
Heller as of the date of acquisition. The premium related to this purchase
was allocated as follows: $78 million to goodwill and $18 million to a
noncompetition agreement. Our consolidation of Factofrance resulted in
increases of $2 billion, $94 million, $59 million and 570 in total assets,
operating revenues, operating expenses and number of employees,
respectively, during 1997 as compared to 1996.
|
(5)
|
Funds employed include
lending assets and investments, less credit balances of our factoring
clients. We believe that funds employed are indicative of the dollar
amount which we have loaned to our borrowers. Average funds employed
(AFE) reflect the average of lending assets and investments, less
credit balances of our factoring clients.
|
(6)
|
Return on average common
stockholders equity is computed as net income less preferred stock
dividends paid divided by average total stockholders equity net of
preferred stock.
|
(7)
|
The ratio of earnings to
combined fixed charges and preferred stock dividends is calculated by
dividing (i) income before income taxes, minority interest and fixed
charges by (ii) fixed charges plus preferred stock dividends.
|
(8)
|
Common dividend payout
ratio is computed as common dividends paid, divided by net income
applicable to common stock. The 1998 common dividend payout ratio excludes
the $983 million dividends paid on the Common Stock owned by
FAHI.
|
(9)
|
Total lending assets and
investments consist of receivables, repossessed assets, equity and real
estate investments, operating leases, debt securities and investments in
international joint ventures.
|
(10)
|
Total managed assets
include funds employed, plus receivables previously securitized or sold
that we currently manage.
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Selected Financial Data and Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Form 10-K. The
following discussion and analysis contains certain forward-looking
statements as defined in the Securities Exchange Act of 1934, which are
generally identified by the words anticipates, believes, estimates,
expects, plans, intends and other similar expressions. These statements
are subject to certain risks, uncertainties and contingencies, which could
cause our actual results, performance or achievements to differ materially
from those expressed in, or implied by, such statements. See Cautionary
Note Regarding Forward-Looking Statements below.
We are in the commercial finance business, providing primarily
collateralized financing and leasing products and related services to
mid-sized and small businesses in the United States and selected
international markets. We classify the sources of our operating revenues in
two broad categories:
|
|
net interest income;
and
|
Net interest income represents the total interest income we earn,
principally through our financing and leasing activities, less the total
interest expense we pay on our interest bearing liabilities, which largely
relate to the funding of these financing and leasing activities.
Non-interest income consists of:
|
|
income from investments in
international joint ventures; and
|
Fees include:
|
|
residual rental
income;
|
Other income includes:
|
|
real estate participation
income;
|
|
|
our share of income from
fund investments;
|
|
|
gains from sales,
syndications and securitizations of lending assets and investments;
and
|
|
|
equipment residual
gains.
|
Our primary expenses, other than interest expense, are operating
expenses, including employee compensation and general and administrative
expenses and provisions for credit losses.
In July 1999, we acquired the assets of HCFP for approximately $475
million. We paid 41% of the purchase price in the form of our Class A Common
Stock and 59% in cash. We issued approximately 7.3 million shares of Class A
Common Stock for the transaction, which reduced the ownership interest in
Heller of our majority shareholder, Fuji Bank, from 57% to 52%. We also
issued options to purchase approximately 1.1 million shares of our Class A
Common Stock. The options were issued at prices ranging from $2 to $37 per
share of our Class A Common Stock to replace stock options previously held
by HCFP employees for HCFP common stock. HCFP was a rapidly growing
commercial finance company exclusively focused on providing secured
financing to small- and mid-sized health care providers throughout the
United States. The HCFP business, combined with our existing healthcare
operations, is operated as a business unit within our Domestic Commercial
Finance segment and is known as Healthcare Finance.
In December 1999, we sold the assets of our Commercial Services unit,
part of our Domestic Commercial Finance segment for approximately $454
million in cash. The sale consisted of $911 million of factored accounts
receivable and the assumption of $577 million of liabilities due to
factoring clients. We recorded an after-tax gain on the sale of
approximately $48 million, which included adjustments for transaction costs,
obligations to employees, termination of third party contracts such as
facility leases and vendor contracts, asset impairment charges, recourse
provisions and certain other costs directly attributable to the
sale.
Our results of operations may vary significantly from quarter to
quarter based upon the timing of certain events, such as securitizations and
net investment gains. See Note 24 to the Consolidated Financial
Statements.
Year Ended December 31, 1999 Compared to Year Ended December 31,
1998
Overview. For the year ended
December 31, 1999:
|
|
Net income totaled $284
million compared with $193 million for the prior year, an increase of
47%.
|
|
|
Net income applicable to
common stock was $256 million compared with $172 million, an increase of
49%.
|
|
|
Net income for 1999
includes a one-time after-tax gain of $48 million relating to the sale of
the assets of our Commercial Services business unit. Excluding this gain,
net income was $236 for the year, an increase of 22% over the prior year,
marking our seventh consecutive year of record net income.
|
|
|
This increase in net
income reflects an increase of $169 million in operating revenues, due to
growth in both net interest income and non-interest income.
|
|
|
The increase in net
interest income, as compared to the prior year, is due to both
strengthening margins and growth in lending assets and investments. See
Operating RevenuesNet Interest Income.
|
|
|
The increase in
non-interest income, as compared to the prior year, is due primarily to
larger net investment gains and larger fee income and other. See
Operating Revenues Non-Interest Income.
|
|
|
New business lending
volume totaled a record $8.1 billion, an increase of 12% over the prior
year. This increase was the result of our significant investment in
building leadership positions in our businesses and in expanding market
coverage.
|
|
|
Our factoring volume
totaled $20.3 billion in 1999, an increase of 5% from the prior year.
Factofrances factoring volume was up 12% over 1998.
|
Operating Revenues. The following
table shows our operating revenues for the years ended December 31, 1999 and
1998:
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
|
Amount
|
|
Percent
of AFE
|
|
Amount
|
|
Percent
of AFE
|
|
|
(dollars in
millions) |
Net interest
income |
|
$512 |
|
3.8 |
% |
|
$423 |
|
3.6 |
% |
Non-interest
income: |
|
|
|
|
|
|
|
|
|
|
Fees and other income |
|
286 |
|
2.1 |
|
|
206 |
|
1.7 |
|
Factoring commissions |
|
119 |
|
0.9 |
|
|
124 |
|
1.0 |
|
Income of international joint ventures |
|
35 |
|
0.2 |
|
|
30 |
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$952 |
|
7.0 |
% |
|
$783 |
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income. The following table shows our net interest
income for the years ended December 31, 1999 and 1998:
|
|
For the Year
Ended
December 31,
|
|
Increase
|
|
|
1999
|
|
1998
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Interest income |
|
$1,197 |
|
|
$1,047 |
|
|
$150 |
|
14.3 |
% |
Interest
expense |
|
685 |
|
|
624 |
|
|
61 |
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ 512 |
|
|
$ 423 |
|
|
$ 89 |
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a
percentage of AFE |
|
3.8 |
% |
|
3.6 |
% |
|
|
|
|
|
Net interest income totaled $512 million for the year ended December
31, 1999, an increase of $89 million, or 21%, from the comparable prior year
period. This increase was driven by strong growth in lending assets and
investments combined with improved net interest margins.
Average funds employed totaled $13.6 billion for 1999, up 15% from
$11.8 billion in 1998, primarily due to new business lending volume of $8.1
billion during the year.
Net interest income as a percentage of AFE increased to 3.8% at
December 31, 1999 from 3.6% at December 31, 1998. This increase reflects
improved pricing in certain product groups, a lower cost of funding and a
more favorable mix of higher yielding products during 1999 as compared to
1998 such as those from HCFP and the Dealer Products Group
acquisitions.
Interest rates we charge vary depending on:
|
|
risks and maturities of
loans;
|
|
|
our current costs of
borrowing;
|
|
|
other governmental
regulations.
|
Our portfolio of receivables earns interest at both variable and fixed
rates. The variable rates float in accordance with various agreed upon
reference rates, including LIBOR, the Prime Rate and corporate based lending
rates.
We use interest rate swaps as an important tool for financial risk
management. They enable us to match more closely the interest rate and
maturity characteristics of our assets and liabilities. As such, we use
interest rate swaps to:
|
|
change the characteristics
of fixed rate debt to that of variable rate liabilities;
|
|
|
alter the characteristics
of specific fixed rate asset pools to more closely match the interest
terms of the underlying financing; and
|
|
|
modify the variable rate
basis of a liability to more closely match the variable rate basis used
for variable rate receivables.
|
The following table shows a comparative analysis of the year-end
principal outstanding and average interest rates we paid on our debt as of
December 31, 1999 and 1998, before and after giving effect to interest rate
swaps:
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
|
Year-
end
balance
|
|
Before
swaps
|
|
After
swaps
|
|
Year-
end
balance
|
|
Before
swaps
|
|
After
swaps
|
|
|
(dollars in
millions) |
Commercial paper
domestic and foreign |
|
$ 3,960 |
|
5.12 |
% |
|
N/A |
|
|
$2,692 |
|
5.52 |
% |
|
N/A |
|
Fixed rate debt |
|
4,817 |
|
6.20 |
|
|
6.61 |
% |
|
3,886 |
|
6.31 |
|
|
6.17 |
% |
Variable rate
debt |
|
3,819 |
|
6.29 |
|
|
6.42 |
|
|
2,879 |
|
5.34 |
|
|
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$12,596 |
|
5.89 |
% |
|
6.53 |
% |
|
$9,457 |
|
5.79 |
% |
|
5.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income. Our non-interest income is composed
of:
|
|
income of international
joint ventures; and
|
|
|
The following table shows
our non-interest income for the years ended December 31, 1999 and
1998:
|
|
|
For the Year
Ended
December 31,
|
|
Increase/(Decrease)
|
|
|
1999
|
|
1998
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Factoring
commissions |
|
$119 |
|
|
$124 |
|
|
$ (5 |
) |
|
(4.0 |
)% |
Income of international
joint ventures |
|
35 |
|
|
30 |
|
|
5 |
|
|
16.7 |
|
Fees and other
income: |
|
|
|
|
|
|
|
|
|
|
|
|
Fee income and other(1) |
|
117 |
|
|
95 |
|
|
22 |
|
|
23.2 |
|
Investment and asset sale income(2) |
|
169 |
|
|
111 |
|
|
58 |
|
|
52.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income |
|
$286 |
|
|
$206 |
|
|
$80 |
|
|
38.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
income |
|
$440 |
|
|
$360 |
|
|
$80 |
|
|
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income as a
percentage of AFE |
|
3.2 |
% |
|
3.0 |
% |
|
|
|
|
|
|
(1)
|
Fee income and other
consists primarily of loan servicing income, late fees, prepayment fees,
early termination fees, residual rental income and other miscellaneous
fees.
|
(2)
|
Investment and asset sale
income consists of gains on securitizations, syndications and loan sales,
net investment income and gains, equipment residual gains and
participation income.
|
Factoring commissions decreased $5 million, or 4%, in 1999 versus 1998
due to lower volume of our domestic factoring business, partially due to the
December 1999 sale of the assets of our Commercial Services unit, combined
with lower factoring commission rates of Factofrance. Increased competition
in the French factoring market and changes in product mix have resulted in
lower factoring commission rates of Factofrance. Our total 1999 factoring
volume increased 5% from the prior year. Factofrances factoring volume
increased 12% over prior year.
Income of international joint ventures represents our share of the
annual earnings or losses of joint ventures. The $5 million increase in
income from international joint ventures in 1999 versus 1998 was due
primarily to higher income from our European joint ventures partially offset
by lower income from our Latin American joint ventures.
Fees and other income totaled $286 million for 1999, an increase of
39% from the prior year due to increases in both fee income and other and
investment and asset sale income. Fee income and other increased $22 million
or 23% compared to 1998. This increase is due to higher fee income in
Leasing Services related to the Dealer Products Group.
Investment and asset sale income increased $58 million, or 52% due to
larger gains recognized on our portfolio of equity investments, higher
income on limited partnership investments and higher gains on asset sales
and equipment residual gains. Net investment gains are generated primarily
from investment activity of Corporate Finance and junior participating
lending activity of Real Estate Finance. The increase in asset sale income
was primarily generated by sales of SBA guaranteed portions of 7(a) loans in
Small Business Finance.
During 1999, we generated $13 million of securitization gains, a
decrease of $4 million from the prior year. Securitization gains during 1999
resulted from three securitization transactions. Leasing Services
securitized approximately $800 million in two term securitizations during
1999 resulting in a net gain of $9 million. Real Estate Finance securitized
approximately $400 million in CMBS receivables resulting in $4 million of
securitization income.
Operating Expenses. The following table shows our
operating expenses for the years ended December 31, 1999 and
1998:
|
|
For the
Year Ended
December 31,
|
|
Increase
|
|
|
1999
|
|
1998
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Salaries and other
compensation |
|
$237 |
|
|
$227 |
|
|
$10 |
|
4 |
% |
General and administrative
expenses |
|
200 |
|
|
164 |
|
|
36 |
|
22 |
|
Goodwill and non-compete
amortization |
|
19 |
|
|
8 |
|
|
11 |
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$456 |
|
|
$399 |
|
|
$57 |
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a
percentage of average managed assets |
|
3.0 |
% |
|
3.1 |
% |
|
|
|
|
|
Ratio of operating
expenses to operating revenues |
|
48 |
% |
|
51 |
% |
|
|
|
|
|
Ratio of operating
expenses, excluding goodwill and non-compete
amortization, as a percentage of operating
revenues |
|
46 |
% |
|
50 |
% |
|
|
|
|
|
Operating expenses, excluding the effect of acquisitions and
divestitures, increased by $5 million, or 1%, in 1999, as compared to 1998.
This modest growth is primarily related to increases in performance related
compensation resulting from strong business performance in 1999, offset by
decreases in salary expense resulting from our fourth quarter 1998
restructuring effort. Operating expenses, excluding the effect of
acquisitions and divestitures also increased as a result of increases in
certain professional fees. Total operating expenses as a percentage of
operating revenues improved to 48% in 1999 from 51% for the prior year and
are in line with our 1999 goal. This decrease reflects improved leveraging
of the Companys cost base.
Allowance for Losses. The
following table shows the changes in our allowance for losses of
receivables, including our provision for losses of receivables and
repossessed assets, for the years ended December 31, 1999 and
1998:
|
|
For the
Year Ended
December 31,
|
|
Increase/(Decrease)
|
|
|
1999
|
|
1998
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Balance at the beginning
of the year |
|
$271 |
|
|
$261 |
|
|
$10 |
|
|
3.8 |
% |
Provision for losses |
|
136 |
|
|
77 |
|
|
59 |
|
|
76.6 |
|
Writedowns |
|
(116 |
) |
|
(145 |
) |
|
29 |
|
|
20.0 |
|
Recoveries |
|
18 |
|
|
64 |
|
|
(46 |
) |
|
(71.9 |
) |
Dealer Products Group acquisition |
|
|
|
|
18 |
|
|
(18 |
) |
|
N/M |
|
HCFP acquisition |
|
7 |
|
|
|
|
|
7 |
|
|
N/M |
|
Sale of HCS assets |
|
(2 |
) |
|
|
|
|
(2 |
) |
|
N/M |
|
Transfers and other |
|
2 |
|
|
(4 |
) |
|
6 |
|
|
150.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the
year |
|
$316 |
|
|
$271 |
|
|
$45 |
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses was higher during 1999 than 1998 due to a
significantly higher level of recoveries recorded in 1998 as compared to
1999. Net writedowns totaled $98 million or 0.7% of average lending assets
in 1999, compared to $81 million or 0.7% in 1998. Net writedown levels for
both 1999 and 1998 are in line with our targeted level of 0.75% of average
lending assets.
Gross writedowns totaled $116 million for 1999 versus $145 million
for 1998, while recoveries totaled $18 million in 1999 versus $64 million
for 1998. The higher level of recoveries in 1998 relates primarily to assets
from business activities the Company is no longer pursuing.
As of December 31, 1999, the ratio of our allowance for losses of
receivables to receivables was 2.1%, compared to 2.3% as of December 31,
1998. The decrease in this ratio reflects the continued improvement of the
credit quality of our portfolio. We will continue to systematically evaluate
the appropriateness of the allowance for losses of receivables and adjust
the allowance to reflect any necessary changes in the credit quality and
inherent risks and losses of our portfolio.
Income Taxes. Excluding the
effect of the HCS sale, our effective income tax rate was 34% for 1999 and
32% for 1998, in each case below the combined Federal and State statutory
rates due to:
|
|
the effect of earnings
from international joint ventures;
|
|
|
the use of foreign tax
credits; and
|
|
|
certain favorable tax
issue resolutions.
|
Lending Assets and Investments
Total lending assets and investments increased $3.4 billion, or 25%,
during 1999 due to record new business originations of $8.1 billion offset
by syndications, securitizations, loan sales and payoffs of $4.7 billion.
The HCFP acquisition increased lending assets and investments by $535
million during 1999. This increase was more than offset by the sale of $900
million of HCS lending assets. During 1999, new business volume represented
a 12% increase from 1998. This increase was largely due to strong new
business volume in all of our domestic product groups.
The following tables present our lending assets and investments by
business line and asset type as of December 31, 1999 and 1998:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
By Business
Category: |
Domestic Commercial
Finance |
|
|
|
|
|
|
|
|
|
|
Corporate Finance |
|
$ 4,937 |
|
29 |
% |
|
$ 3,722 |
|
28 |
% |
Leasing Services |
|
3,428 |
|
20 |
|
|
2,840 |
|
21 |
|
Real Estate Finance |
|
2,626 |
|
16 |
|
|
1,889 |
|
14 |
|
Small Business Finance |
|
1,312 |
|
8 |
|
|
1,013 |
|
8 |
|
Healthcare Finance |
|
971 |
|
6 |
|
|
217 |
|
1 |
|
Commercial Services (1) |
|
|
|
|
|
|
401 |
|
3 |
|
Other |
|
518 |
|
3 |
|
|
687 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Domestic Commercial
Finance |
|
13,792 |
|
82 |
|
|
10,769 |
|
80 |
|
International Factoring
and Asset Based Finance (2) |
|
3,040 |
|
18 |
|
|
2,661 |
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$16,832 |
|
100 |
% |
|
$13,430 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
By Asset Type: |
|
|
|
|
|
|
|
|
|
|
Receivables |
|
$14,795 |
|
88 |
% |
|
$11,854 |
|
88 |
% |
Repossessed assets |
|
24 |
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets |
|
14,819 |
|
88 |
|
|
11,857 |
|
88 |
|
Equity and real estate investments |
|
737 |
|
5 |
|
|
617 |
|
5 |
|
Debt securities |
|
549 |
|
3 |
|
|
400 |
|
3 |
|
Operating leases |
|
508 |
|
3 |
|
|
321 |
|
2 |
|
International joint ventures |
|
219 |
|
1 |
|
|
235 |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$16,832 |
|
100 |
% |
|
$13,430 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
Average lending assets |
|
$13,235 |
|
|
|
|
$11,506 |
|
|
|
Total managed assets |
|
17,202 |
|
|
|
|
13,664 |
|
|
|
Average managed assets |
|
14,963 |
|
|
|
|
13,007 |
|
|
|
Funds employed |
|
15,839 |
|
|
|
|
11,989 |
|
|
|
Average funds employed |
|
13,636 |
|
|
|
|
11,814 |
|
|
|
(1)
|
Lending assets and
investments of Commercial Services at December 31, 1998 were reduced by
$475 million of factored accounts receivable sold to bank-supported
conduits.
|
(2)
|
Includes $215 million in
investments in international joint ventures, representing 1% of total
lending assets and investments in 1999, and $231 million in investments in
international joint ventures, representing 2% of total lending assets and
investments, in 1998.
|
As of December 31, 1999, our domestic commercial finance portfolio
remained well diversified among our domestic product groups:
|
|
Corporate Finance
increased its lending assets and investments to $4.9 billion, or 29% of
total lending assets and investments, as a result of $3.1 billion in new
business volume, which was partially offset by loan syndications and
runoff in the portfolio of $2.3 billion. Of the total lending assets and
investments, approximately $900 million represents asset-based
financings.
|
|
|
Leasing Services grew to
$3.4 billion, or 20% of our total lending assets and investments, at
December 31, 1999, primarily due to new business volume of $2.3 billion
offset by payoffs, utilization and securitizations totaling approximately
$1.6 billion in receivables.
|
|
|
Real Estate Finance
increased its lending assets and investments to $2.6 billion, or 16% of
our total lending assets and investments as of December 31, 1999 versus
14% at
December 31, 1998 as new business volume of $1.4 billion was offset by
payoffs, securitizations and syndications totaling nearly $840
million.
|
|
|
Small Business Finance
increased its lending assets and investments by nearly $300 million due to
record new business volume of over $700 million. This was partially offset
by loan sales and payoffs of approximately $370 million.
|
|
|
Healthcare Finance
increased its lending assets and investments to approximately $1 billion,
or 6% of total lending assets and investments as of December 31, 1999. Of
this amount, about $535 million was as a result of the HCFP acquisition in
July 1999. In addition, we combined approximately $350 million of lending
assets and investments from our existing healthcare finance activities
within Real Estate Finance and Corporate Finance.
|
Concentrations of lending assets of 5% or more at December 31, 1999
and 1998, based on the standard industrial classifications of the borrowers,
were as follows:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Automotive |
|
$1,325 |
|
9 |
% |
|
$667 |
|
6 |
% |
Computers |
|
938 |
|
6 |
|
|
811 |
|
7 |
|
Department and general
merchandise retail stores |
|
877 |
|
6 |
|
|
935 |
|
8 |
|
Health services |
|
864 |
|
6 |
|
|
202 |
|
2 |
|
Transportation |
|
661 |
|
4 |
|
|
666 |
|
6 |
|
Food, grocery and
miscellaneous retail |
|
642 |
|
4 |
|
|
650 |
|
5 |
|
General industrial
machines |
|
599 |
|
4 |
|
|
732 |
|
6 |
|
With respect to the above table:
|
|
The automotive category is
primarily comprised of auto parts distributors and wholesalers, resale and
leasing services in the automotive and aircraft industries and maintenance
services for automotive and aircraft parts.
|
|
|
The computers category
consists of software/hardware distributors and manufacturers, component
manufacturers and end-users of this equipment.
|
|
|
The department and general
merchandise retail stores category is primarily comprised of factored
accounts receivable, which represent short-term trade receivables from
numerous customers.
|
|
|
The health services
category is primarily comprised of revolving and term facilities with
small- and mid-sized health care providers. The increase in this category
from 1998 is due to the acquisition of HCFP.
|
|
|
A majority of the lending
assets in the transportation category arise from chartered aircraft
services and transportation services for freight, cargo and other various
packages.
|
|
|
The majority of lending
assets in the food, grocery and miscellaneous retail category are
revolving and term facilities with borrowers that are primarily in the
business of manufacturing and retailing of food products.
|
|
|
The general industrial
machines classification is distributed among machinery used for many
different industrial applications.
|
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997
Overview. For the year ended December 31,
1998:
|
|
Net income totaled $193
million compared with $158 million for the prior year, an increase of 22%.
This represented our sixth consecutive year of record net
income.
|
|
|
Net income applicable to
common stock was $172 million for the year ended December 31, 1998. This
represented an increase of 19% from $144 million for the prior year and
reflects an increase of $29 million in operating revenues, due to growth
in both net interest income and non-interest income, coupled with a
decrease in the provision for losses of $87 million, or 53% from December
31, 1997.
|
|
|
Earnings were reduced by a
one-time charge of $17 million, relating to our restructuring initiative,
which was recorded in the fourth quarter.
|
|
|
The increase in net
interest income, as compared to the prior year, is due to growth in
lending assets and investments.
|
|
|
The decrease in provision
for losses is due to a significant increase in recoveries coupled with a
decrease in writedowns. Our allowance for losses of receivables at
year-end was in excess of 100% of nonearning impaired
receivables.
|
|
|
New business lending
volume totaled a record $7.2 billion, an increase of 20% over the prior
year. This increase was the result of our significant investment in
building leadership positions in our businesses and in expanding market
coverage.
|
|
|
Our factoring volume
totaled $19.4 billion in 1998, an increase of 21% from the prior year, due
to significant growth of Factofrance.
|
Operating Revenues. The following table shows our
operating revenues for the years ended December 31, 1998 and
1997:
|
|
For the Year Ended
December 31,
|
|
|
1998
|
|
1997
|
|
|
Amount
|
|
Percent
of AFE
|
|
Amount
|
|
Percent
of AFE
|
|
|
(dollars in
millions) |
Net interest
income |
|
$423 |
|
3.6 |
% |
|
$408 |
|
4.0 |
% |
Non-interest
income: |
Fees and other income |
|
206 |
|
1.7 |
|
|
206 |
|
2.1 |
|
Factoring commissions |
|
124 |
|
1.0 |
|
|
104 |
|
1.0 |
|
Income of international joint ventures |
|
30 |
|
0.3 |
|
|
36 |
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$783 |
|
6.6 |
% |
|
$754 |
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income. The following table shows our net interest
income for the years ended December 31, 1998 and 1997:
|
|
For the Year
Ended
December 31,
|
|
Increase
|
|
|
1998
|
|
1997
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Interest income |
|
$1,047 |
|
|
$ 924 |
|
|
$123 |
|
13.3 |
% |
Interest
expense |
|
624 |
|
|
516 |
|
|
108 |
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ 423 |
|
|
$ 408 |
|
|
$ 15 |
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a
percentage of AFE |
|
3.6 |
% |
|
4.0 |
% |
|
|
|
|
|
Net interest income totaled $423 million for the year ended December
31, 1998, an increase of $15 million, or 4%, from the comparable prior year
period. This increase was driven by strong growth in lending assets and
investments offset by tightening net interest margins.
Average funds employed totaled $11.8 billion for 1998, up 17% from
$10.1 billion in 1997 due to record new business lending volume of $7.2
billion during the year.
Net interest income as a percentage of AFE decreased to 3.6% at
December 31, 1998 from 4.0% at December 31, 1997. This decline reflects the
competitive pricing pressures in certain product groups and the impact of
the CMBS product, which carries a significantly lower net interest margin
than other receivables. The lower yielding CMBS portfolio decreased our
total net interest margin by approximately 0.30% for the twelve months ended
December 31, 1998. Total net interest margin for 1998 was also reduced by
0.05% as a result of interest expense recorded on the $450 million note
related to the Fuji America Holdings dividend paid in February
1998.
Interest rates we charge vary depending on:
|
|
risks and maturities of
loans;
|
|
|
our current costs of
borrowing;
|
|
|
other governmental
regulations.
|
Our portfolio of receivables earns interest at both variable and fixed
rates. The variable rates float in accordance with various agreed upon
reference rates, including LIBOR, the Prime Rate and corporate based lending
rates.
We use interest rate swaps as an important tool for financial risk
management. They enable us to match more closely the interest rate and
maturity characteristics of our assets and liabilities. As such, we use
interest rate swaps to:
|
|
change the characteristics
of fixed rate debt to that of variable rate liabilities;
|
|
|
alter the characteristics
of specific fixed rate asset pools to more closely match the interest
terms of the underlying financing; and
|
|
|
modify the variable rate
basis of a liability to more closely match the variable rate basis used
for variable rate receivables.
|
The following table shows a comparative analysis of the year-end
principal outstanding and average interest rates we paid on our debt as of
December 31, 1998 and 1997, before and after giving effect to interest rate
swaps:
|
|
For the Year Ended
December 31,
|
|
|
1998
|
|
1997
|
|
|
Year-
end
balance
|
|
Before
swaps
|
|
After
swaps
|
|
Year-
end
Balance
|
|
Before
swaps
|
|
After
swaps
|
|
|
(dollars in
millions) |
Commercial paper
domestic and foreign |
|
$2,692 |
|
5.52 |
% |
|
N/A |
|
|
$2,560 |
|
5.71 |
% |
|
N/A |
|
Fixed rate debt |
|
3,886 |
|
6.31 |
|
|
6.17 |
% |
|
3,951 |
|
6.90 |
|
|
6.67 |
% |
Variable rate
debt |
|
2,879 |
|
5.34 |
|
|
5.59 |
|
|
2,051 |
|
5.44 |
|
|
6.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$9,457 |
|
5.79 |
|
|
5.92 |
|
|
$8,562 |
|
6.19 |
|
|
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income. The following table shows our
non-interest income for the years ended December 31, 1998 and
1997:
|
|
For the
Year Ended
December 31,
|
|
Increase/(Decrease)
|
|
|
1998
|
|
1997
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Factoring
commissions |
|
$124 |
|
|
$104 |
|
|
$ 20 |
|
|
19.2 |
% |
Income of international
joint ventures |
|
30 |
|
|
36 |
|
|
(6 |
) |
|
(16.7 |
) |
Fees and other
income: |
|
|
|
|
|
|
|
|
|
|
|
|
Fee income and other(1) |
|
95 |
|
|
88 |
|
|
7 |
|
|
8.0 |
|
Investment and asset sale income (2) |
|
111 |
|
|
118 |
|
|
(7 |
) |
|
(5.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income |
|
$206 |
|
|
$206 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
income |
|
$360 |
|
|
$346 |
|
|
$ 14 |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income as a
percentage of AFE |
|
3.0 |
% |
|
3.5 |
% |
|
|
|
|
|
|
(1)
|
Fee income and other
consists primarily of loan servicing income, late fees, prepayment fees,
early termination fees, residual rental income and other miscellaneous
fees.
|
(2)
|
Investment and asset sale
income consists of gains on securitizations, syndications and loan sales,
net investment income and gains, equipment residual gains and
participation income.
|
Our non-interest income is composed of:
|
|
income of international
joint ventures; and
|
Factoring commissions increased $20 million, or 19%, in 1998 versus
1997 due to significant growth in international factoring volume and the
consolidation of Factofrance for the full year of 1998 versus nine months in
1997, offset by some compression in factoring commission rates. Our total
1998 factoring volume, adjusted for the impact of the Factofrance
consolidation for twelve months in 1998 versus nine months in 1997,
increased 21% from the prior year, including a significant increase in
factoring volume recorded by Factofrance of 34%.
Income of international joint ventures represents our share of the
annual earnings or losses of joint ventures. The $6 million decrease in
income from international joint ventures in 1998 versus 1997 was due
primarily to the consolidation of Factofrance as described
above.
Fees and other income totaled $206 million for 1998, unchanged from
the prior year. An increase in fee income and other was offset by a decrease
in investment and asset sale income during 1998 as compared to 1997. Fee
income and other increased $7 million, or 8%, as we recognized increased
prepayment income and fees on available lines of credit, as compared to the
prior year. Investment and asset sale income decreased $7 million, or 6%, as
increased income on lending asset sales of Real Estate Finance and Small
Business Finance was offset by a decrease in net investment gains of Real
Estate Finance and lower securitization income.
During 1998, we generated $17 million of securitization gains, a
decrease of $9 million from the prior year. Securitization gains in 1998
resulted from two CMBS securitizations totaling $2 billion, a $96 million
securitization of the unguaranteed portion of SBA 7(a)
loans and a $434 million sale of equipment receivables to a conduit. The lower
level of securitization gains in 1998 is due to lower income realization on
the CMBS securitizations. We did not retain any interest in the first CMBS
transaction completed in the first quarter of 1998 totaling $1.1 billion. In
the second CMBS securitization completed in the fourth quarter of 1998, we
sold all of the unrated and B rated securities to third parties
on a non-recourse basis. We retained an interest in the SBA securitization,
as required by the SBA, and an interest in the equipment sales
transaction.
Operating Expenses. The following table shows our
operating expenses for the years ended December 31, 1998 and
1997:
|
|
For the
Year Ended
December 31,
|
|
Increase
|
|
|
1998
|
|
1997
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Salaries and other
compensation |
|
$227 |
|
|
$214 |
|
|
$13 |
|
6.1 |
% |
General and administrative
expenses |
|
164 |
|
|
137 |
|
|
27 |
|
19.7 |
|
Goodwill and non-compete
amortization |
|
8 |
|
|
6 |
|
|
2 |
|
33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$399 |
|
|
$357 |
|
|
$42 |
|
11.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a
percentage of average managed assets |
|
3.1 |
% |
|
3.3 |
% |
|
|
|
|
|
Ratio of operating
expenses to operating revenues |
|
51.0 |
% |
|
47.3 |
% |
|
|
|
|
|
Operating expenses,
excluding goodwill and
non-compete amortization, as a percentage
of operating revenues |
|
50.0 |
% |
|
46.6 |
% |
|
|
|
|
|
Operating expenses, excluding the impact of the Factofrance
consolidation, increased by $21 million, or 6%, in 1998, as compared to
1997. This increase is primarily due to investment in lower risk businesses,
increased information technology expenses including amounts associated with
year 2000 compliance efforts and investment in our national brand building
marketing campaign (Straight Talk, Smart Deals). See
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of OperationsYear 2000 Compliance.
Operating expenses as a percentage of average managed assets decreased
to 3.1% as of December 31, 1998 from 3.3% at December 31, 1997, reflective
of our focus on improving operating efficiency.
Allowance for Losses. The following table shows the
changes in our allowance for losses of receivables, including our provision
for losses of receivables and repossessed assets, for the years ended
December 31, 1998 and 1997:
|
|
For the
Year Ended
December 31,
|
|
Increase/(Decrease)
|
|
|
1998
|
|
1997
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Balance at the beginning
of the year |
|
$261 |
|
|
$225 |
|
|
$36 |
|
|
16.0 |
% |
Provision for losses |
|
77 |
|
|
164 |
|
|
(87 |
) |
|
(53.0 |
) |
Writedowns |
|
(145 |
) |
|
(169 |
) |
|
24 |
|
|
14.2 |
|
Recoveries |
|
64 |
|
|
23 |
|
|
41 |
|
|
178.3 |
|
Factofrance consolidation |
|
|
|
|
18 |
|
|
(18 |
) |
|
N/M |
|
Dealer Products Group acquisition |
|
18 |
|
|
|
|
|
18 |
|
|
N/M |
|
Transfers and other |
|
(4 |
) |
|
|
|
|
(4 |
) |
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the
year |
|
$271 |
|
|
$261 |
|
|
$10 |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses decreased to $77 million in 1998 from $164
million in 1997. This decrease reflects the continued strong asset quality
of our portfolio coupled with higher levels of recoveries and lower levels
of writedowns. Net writedowns for 1998 totaled $81 million or 0.7% of
average lending assets, compared to $146 million or 1.5% for the same period
in 1997. Excluding a $40 million writedown of CMBS receivables, net
writedowns were $41 million or 0.4% of average lending assets for the
year.
Net writedowns for 1998 were within our stated writedown target of
0.75% of average lending assets. Gross writedowns totaled $145 million for
1998 versus $169 million for 1997, while recoveries totaled $64 million in
1998 versus $23 million for 1997. The increase in recoveries for 1998
related primarily to assets from activities we are no longer
pursuing.
As of December 31, 1998, the ratio of our allowance for losses of
receivables to receivables was 2.3%, compared to 2.4% as of December 31,
1997. The decrease in this ratio reflected the continued improvement of the
credit quality of our portfolio.
Income Taxes. Our effective income tax rate was 32% for
1998 and 28% for 1997, in each case below the statutory rate due
to:
|
|
the use of foreign tax
credits;
|
|
|
the effect of earnings
from international joint ventures; and
|
|
|
certain favorable tax
issue resolutions.
|
Lending Assets and Investments
Total lending assets and investments increased $1.5 billion, or 13%,
during 1998 due to record new business originations of $7.2 billion and an
approximate $625 million increase in assets from the Dealer Products Group
acquisition, offset by $6.4 billion of paydowns, loan sales, syndications
and securitizations. During 1998, new business volume represented a 20%
increase over 1997, as we realized the benefit of the market positions held
by Corporate Finance, Real Estate Finance and Small Business
Finance.
The following table presents our lending assets and investments by
business line and asset type as of December 31, 1998 and 1997:
|
|
December
31,
|
|
|
1998
|
|
1997
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
By Business
Category: |
|
|
|
|
|
|
|
|
|
|
Domestic Commercial
Finance |
|
|
|
|
|
|
|
|
|
|
Corporate Finance |
|
$ 3,722 |
|
28 |
% |
|
$ 3,066 |
|
26 |
% |
Real Estate Finance |
|
1,889 |
|
14 |
|
|
2,323 |
|
20 |
|
Leasing Services |
|
2,840 |
|
21 |
|
|
2,314 |
|
19 |
|
Small Business Finance |
|
1,013 |
|
8 |
|
|
766 |
|
6 |
|
Healthcare Finance |
|
217 |
|
1 |
|
|
|
|
|
|
Commercial Services |
|
401 |
|
3 |
|
|
361 |
|
3 |
|
Other |
|
687 |
|
5 |
|
|
737 |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Domestic Commercial
Finance |
|
10,769 |
|
80 |
|
|
9,567 |
|
80 |
|
International Factoring
and Asset Based Finance(1) |
|
2,661 |
|
20 |
|
|
2,361 |
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$13,430 |
|
100 |
% |
|
$11,928 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
By Asset
Type: |
|
|
|
|
|
|
|
|
|
|
Receivables |
|
$11,854 |
|
88 |
% |
|
$10,722 |
|
90 |
% |
Repossessed assets |
|
3 |
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets |
|
11,857 |
|
88 |
|
|
10,736 |
|
90 |
|
Equity and real estate investments |
|
617 |
|
5 |
|
|
488 |
|
4 |
|
Debt securities |
|
400 |
|
3 |
|
|
311 |
|
3 |
|
Operating leases |
|
321 |
|
2 |
|
|
195 |
|
1 |
|
International joint ventures |
|
235 |
|
2 |
|
|
198 |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total lending assets and investments |
|
$13,430 |
|
100 |
% |
|
$11,928 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
Average lending assets |
|
$11,506 |
|
|
|
|
$ 9,640 |
|
|
|
Total managed assets |
|
13,664 |
|
|
|
|
11,800 |
|
|
|
Average managed assets |
|
13,007 |
|
|
|
|
10,687 |
|
|
|
Funds employed |
|
11,989 |
|
|
|
|
10,673 |
|
|
|
Average funds employed |
|
11,814 |
|
|
|
|
10,081 |
|
|
|
(1)
|
Includes $231 million in
investments in international joint ventures, representing 2% of total
lending assets and investments in 1998, and $198 million in investments in
international joint ventures, representing 2% of total lending assets and
investments, in 1997.
|
As of December 31, 1998, our domestic commercial finance portfolio
remained well diversified between Corporate Finance, Leasing Services and
Real Estate Finance:
|
|
Corporate Finance
increased its lending assets and investments to $3.7 billion as a result
of $2.7 billion in new business volume, which was partially offset by loan
syndications and runoff in the portfolio.
|
|
|
Leasing Services grew to
$2.8 billion, or 21% of our total lending assets and investments, at
December 31, 1998, primarily due to the Dealer Products Group acquisition
of approximately $625 million in assets offset by the December 1998
equipment sale of $434 million in receivables.
|
|
|
Real Estate Finance
decreased to 14% of our total lending assets and investments as of
December 31, 1998 versus 20% at December 31, 1997 as new business volume
of $2.2 billion was offset by payoffs and CMBS securitizations totaling $2
billion.
|
Concentrations of lending assets of 5% or more at December 31, 1998
and 1997, based on the standard industrial classifications of the borrowers,
were as follows:
|
|
December
31,
|
|
|
1998
|
|
1997
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
(dollars in
millions) |
Department and general
merchandise retail stores |
|
$935 |
|
8 |
% |
|
$511 |
|
5 |
% |
Computers |
|
811 |
|
7 |
|
|
164 |
|
2 |
|
General industrial
machines |
|
732 |
|
6 |
|
|
637 |
|
6 |
|
Automotive |
|
667 |
|
6 |
|
|
714 |
|
7 |
|
Transportation |
|
666 |
|
6 |
|
|
294 |
|
3 |
|
Food, grocery and
miscellaneous retail |
|
650 |
|
5 |
|
|
603 |
|
6 |
|
With respect to the above table:
|
|
The department and general
merchandise retail stores category is primarily comprised of factored
accounts receivable, which represent short-term trade receivables from
numerous customers.
|
|
|
The computers category
consists of software/hardware distributors and manufacturers, plastic
component manufacturers and disk drive designers.
|
|
|
The general industrial
machines classification is distributed among machinery used for many
different industrial applications.
|
|
|
The automotive category is
primarily comprised of auto parts distributors and wholesalers, resale and
leasing services in the automotive and aircraft industries and maintenance
services for automotive and aircraft parts.
|
|
|
A majority of the lending
assets in the transportation category arise from chartered aircraft
services and transportation services for freight, cargo and other various
packages.
|
|
|
The majority of lending
assets in the food, grocery and miscellaneous retail category are
revolving and term facilities with borrowers that are primarily in the
business of manufacturing and retailing of food products.
|
Liquidity and Capital Resources
We manage liquidity to fund asset growth and meet debt obligations
primarily by:
|
|
monitoring the relative
maturities of assets and liabilities; and
|
|
|
borrowing funds through
the U.S. and international money and capital markets and bank credit
markets.
|
Our primary sources of funds are:
|
|
commercial paper
borrowings;
|
|
|
issuances of medium-term
notes and other debt securities;
|
|
|
paydowns on lending
assets; and
|
|
|
the securitizations,
syndications and sales of lending assets.
|
During 1999, our major funding requirements included:
|
|
$8.1 billion of
longer-term loans, leases and investments funded;
|
|
|
a net increase in
short-term loans and advances to factoring clients of $1.1
billion;
|
|
|
the retirement of $2.9
billion of senior notes;
|
|
|
common and preferred
dividends of over $62 million; and
|
|
|
the HCFP acquisition for
approximately $475 million.
|
Our major sources of funding these requirements included:
|
|
cash flows from operations
of $742 million;
|
|
|
loan repayments and
investment and equipment on lease proceeds of $2.8 billion;
|
|
|
the syndication,
securitization and sale of over $2.4 billion of loans;
|
|
|
the issuance of $4.8
billion of senior notes;
|
|
|
the increase in commercial
paper and short-term debt of $1.5 billion;
|
|
|
the issuance of $192
million of Class A Common Stock; and
|
|
|
proceeds of $454 million
from the sale of the assets of HCS.
|
Senior note issuances include $600 million relating to our first
global bond offering that occurred in March 1999. This offering of notes has
expanded our international investor base, thereby extending potential
sources of liquidity.
While our portfolio demonstrated increasing liquidity in both its
longer term loans and revolving loans, we continued to maintain a
conservative funding posture, with commercial paper and short-term
borrowings amounting to 38% of total debt at December 31, 1999 compared to
35% at the end of 1998.
As of December 31, 1999:
|
|
Our committed bank credit
and asset sale facilities totaled $5.7 billion and represented 110% of our
outstanding commercial paper and short-term borrowings.
|
|
|
Committed bank credit and
asset sale facilities in the United States also were well in excess of
100% of U.S. commercial paper borrowings at December 31, 1999.
|
The amount of committed bank credit facilities includes approximately
$4.1 billion in available liquidity support under four agreements, the
longest of which is a multi-year facility expiring in April 2002. Two of our
three separate 364-day bank credit facilities expire in April 2000 (both of
which we intend to renew) and the third expires in September
2000.
We have $379 million of additional alternative liquidity, which is
available by discounting eligible French receivables with the French Central
Bank since Factofrance is a registered financial institution in
France.
We also have included in our committed facilities a 364-day facility,
expiring December 2000, which allows us to sell up to $400 million of our
equipment receivables to two bank-sponsored conduits. These receivables are
sold on a limited recourse basis. As of year-end, we had not sold any
receivables under this facility.
The consolidated international subsidiaries are funded primarily
through short-term money market and bank borrowings, which are supported by
approximately $800 million (U.S. dollar equivalent) of committed foreign
bank credit facilities.
Through our wholly-owned subsidiary, Factofrance, we have a factored
accounts receivable sale facility. This facility allows us to sell an
undivided interest of up to 1 billion
French francs in a designated pool of our factored accounts receivable to one
bank-sponsored conduit on a limited recourse basis. As of December 31, 1999,
approximately
1 billion French francs (or $165 million) of receivables were sold under this
facility.
We have a shelf registration statement, filed with the SEC, permitting
the offering of up to $5 billion in debt securities (including medium term
notes), senior preferred stock and Class A Common Stock. As of December 31,
1999, there was $89 million available under this shelf
registration.
In August 1999, we filed with the SEC a shelf registration statement
covering the sale of up to $10 billion in debt securities (including medium
term notes), senior preferred stock and Class A Common Stock. As of December
31, 1999, since no securities had been issued, we had $10 billion available
under this shelf registration.
In October 1999, we established a Euro Medium-Term Note Program for
the issuance of up to $2 billion in notes to be issued from time to
time.
Also in October 1999, we increased the size of our Euro commercial
paper program to $1 billion and established a $250 million Canadian
commercial paper program.
In November 1999, we issued $600 million of 7.375% notes due November
1, 2009 in a privately placed transaction under SEC Rule 144A and Regulation
S. In February 2000, we filed a registration statement with the SEC in order
to exchange these notes for substantially identical registered
notes.
In addition to these various sources of liquidity, we have access to
$500 million of additional liquidity support under the Keep Well Agreement
between Heller and Fuji Bank. This agreement, which cannot be terminated by
either party prior to December 31, 2002, also provides that Fuji Bank will
maintain our net worth at an amount equal to $500 million. Fuji Bank has
never been required to make any capital contribution or advance any funds to
us under the Keep Well Agreement.
Our ratio of debt (net of short-term investments) to total stockholders
equity remained conservative relative to commercial finance industry
peers at 5.8 times and 5.2 times at December 31, 1999 and 1998,
respectively. Leverage and the level of commercial paper and short-term
borrowings continued to remain within ranges we have targeted to maintain a
strong financial position.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
Accounting for Derivative Instruments and Hedging Activities, as
amended by Statement of Financial Accounting Standards No. 137, Deferral
of the Effective Date of FASB Statement No. 133 (collectively referred
to as SFAS No. 133). This Statement establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Changes in the fair value of the derivative are to be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows gains and losses on derivatives to
offset related results on the hedged items in the income statement and
requires that a company must document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We are assessing
the impact of this statement and will adopt it on January 1,
2001.
We experienced no significant system or other Year 2000 problems at
the turn of the millennium or since then to the date of this report, nor has
there been any material change in the total costs of remediation. We do not
believe our spending patterns or cost relationships have been materially
affected by Year 2000 remediation expenditures or postponement of other
expenses for other information technology projects or for non-technology
projects. We also saw no significant change in revenue patterns or borrower
requests for funds in late 1999, and so we do not believe that any
significant shifting of revenues or income occurred between late 1999 and
early 2000. Finally, we have to date experienced no Year 2000 related
difficulty in transacting with third party vendors and
suppliers.
In summary, we adopted a phased approach to assessing and, where
necessary, remediating or otherwise addressing, Year 2000 issues. Phases
included:
|
|
remediation or
implementation of contingency solutions; and
|
We made certain investments in our software applications and systems
to ensure that our systems would function properly through and beyond the
year 2000. Including systems that service the Dealer Products Group and
HCFP, we have:
|
|
four loan processing
systems;
|
|
|
three lease processing
systems;
|
|
|
a factoring system;
and
|
|
|
systems for general ledger
processing, payroll, accounts payable, fixed assets, treasury and other
smaller applications.
|
We also addressed the impact of the Year 2000 issue on our
consolidated international subsidiaries and our international joint venture
companies. As a result of the risk assessment completed with respect to
these international companies in 1998, significant remediation activity and
additional readiness validation were completed in 1999. During the first
quarter of 1999, we engaged an independent consultant to conduct site visits
and a limited scope review of overall Year 2000 preparedness activities at
certain of our international companies.
In addition to information technology systems, we assessed and
monitored potential Year 2000 impacts on our material vendors and borrowers,
as well as Year 2000 issues relating to environmental factors such as
facilities and general utilities. With respect to borrowers, a Year 2000
risk assessment was incorporated into our underwriting and portfolio
management activities in order to evaluate exposure due to any lack of
compliance on the part of borrowers. Finally, we incorporated Year 2000
contingency planning into our overall business resumption program in
consideration of facilities and other environmental factors as well as with
respect to mission-critical processes.
We incurred approximately $18 million to date of expenses related to
the Year 2000 issue and estimate that we will incur insignificant additional
expenses relating to the issue. We expensed remediation, compliance,
maintenance and modification costs as incurred.
We continue to bear some risk related to the Year 2000 issue, although
we believe such risk to be immaterial. We are not aware of any continuing
contingencies, but we could be
materially adversely affected if third parties with whom we have material
relationships (e.g., vendors, including those providing outsourced
technology services such as mainframe and application support, borrowers and
power companies) did not or do not appropriately address their own Year 2000
compliance issues.
Cautionary Note Regarding Forward-Looking Statements
This Form 10-K Annual Report and the information incorporated by
reference in it includes or will include forward-looking statements,
as defined in Section 27A of the Securities Act and Section 21E of the
Exchange Act, that reflect our current expectations regarding our future
results of operations, performance and achievements. We intend for these
forward-looking statements to be covered by the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. We have tried to
identify these forward-looking statements by using words such as
anticipates, believes, estimates, expects, plans, intends and other
similar expressions. These forward-looking statements are based on
information currently available to us and are subject to risks,
uncertainties and contingencies which could cause our actual results,
performance or achievements for 2000 and beyond to differ materially from
those expressed in, or implied by these statements.
These risks, uncertainties and contingencies include, but are not
limited to, the following:
|
|
the success or failure of
our efforts to implement our business strategy;
|
|
|
effects of economic
conditions in the real estate markets, the capital markets or other
markets or industries we serve and the performance of
borrowers;
|
|
|
changes in the volume and
mix of interest earning assets, the level of interest rates earned on
those assets, the volume of interest-bearing liabilities and the level of
interest rates paid on those interest-bearing liabilities;
|
|
|
currency exchange rate
fluctuations, economic conditions and competition in international
markets, and other international factors;
|
|
|
actions of our competitors
and our ability to respond to those actions;
|
|
|
the cost of our capital,
which depends in part on our portfolio quality, ratings, prospects and
outlook and general market conditions;
|
|
|
the adequacy of our
allowance for losses of receivables;
|
|
|
our ability to attract and
retain qualified and experienced management, sales and credit personnel;
and
|
|
|
changes in governmental
regulations, tax rates and similar matters.
|
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we assume no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, changed circumstances
or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS.
See Item 1. Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HELLER FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL
REPORTING
The management of Heller Financial, Inc. and its subsidiaries (the
Company) is responsible for the preparation, integrity and
objectivity of the accompanying consolidated financial statements. The
statements were prepared in accordance with generally accepted accounting
principles reflecting, where applicable, managements best estimates
and judgments. The other financial information in the December 31, 1999
annual report filed on Form 10-K is consistent with that contained in the
consolidated financial statements.
The Companys consolidated financial statements have been audited
by Arthur Andersen LLP, independent public accountants. Arthur Andersen LLP
is engaged to audit the consolidated financial statements and conducts such
tests and related procedures as it deems necessary in conformity with
generally accepted auditing standards. The opinion of the independent
auditors, based upon their audits of the consolidated financial statements,
is contained in this Form 10-K. Management has made available to Arthur
Andersen LLP all the Companys financial records and related data, as
well as the minutes of the stockholders and directors
meetings.
Management is responsible for establishing and maintaining a system of
internal accounting controls and procedures to provide reasonable assurance
that assets are safeguarded and that transactions are authorized, recorded
and reported properly. The internal accounting control system is augmented
by a program of internal audits and appropriate reviews by management,
written policies and guidelines and careful selection and training of
qualified personnel. Management considers the internal auditors and
Arthur Andersen LLPs recommendations concerning the Companys
system of internal accounting controls and takes action in a cost-effective
manner to appropriately respond to these recommendations. Management
believes that the Companys internal accounting controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable
for preparing financial statements and other data and for maintaining
accountability of assets.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the Companys affairs are conducted according
to high standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Companys code of ethical business
practices, which is publicized throughout the Company. The code of ethical
business practices addresses, among other things, the need for open
communication within the Company, potential conflicts of interest,
compliance with all domestic and foreign laws, including those relating to
financial disclosure, and the confidentiality of proprietary
information.
|
Chairman and Chief
Executive Officer
|
|
Executive Vice
President and Chief Financial Officer
|
|
Executive Vice
President, Controller and Chief Accounting Officer
|
HELLER FINANCIAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Heller Financial, Inc.:
We have audited the accompanying consolidated balance sheets of HELLER
FINANCIAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
stockholders equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Heller
Financial, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Chicago, Illinois
January 18, 2000
(except with respect to Note 26, as
to
which the date is February 15,
2000)
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
ASSETS
|
|
|
|
|
Cash and cash
equivalents |
|
$ 516 |
|
|
$ 529 |
|
Receivables (Note
6) |
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
Term loans |
|
4,652 |
|
|
3,233 |
|
Revolving loans |
|
2,055 |
|
|
1,832 |
|
Real estate loans |
|
2,405 |
|
|
1,718 |
|
Factored accounts
receivable |
|
2,708 |
|
|
2,543 |
|
Equipment loans and leases |
|
2,975 |
|
|
2,528 |
|
|
|
|
|
|
|
|
Total receivables |
|
14,795 |
|
|
11,854 |
|
Less: Allowance for losses of
receivables (Note 6) |
|
316 |
|
|
271 |
|
|
|
|
|
|
|
|
Net receivables |
|
14,479 |
|
|
11,583 |
|
Equity and real estate
investments (Note 7) |
|
737 |
|
|
652 |
|
Debt securities (Note
7) |
|
549 |
|
|
365 |
|
Operating leases (Note
7) |
|
508 |
|
|
321 |
|
Investments in
international joint ventures (Note 7) |
|
219 |
|
|
235 |
|
Goodwill (Note
7) |
|
481 |
|
|
269 |
|
Other assets (Note
7) |
|
484 |
|
|
412 |
|
|
|
|
|
|
|
|
Total assets |
|
$17,973 |
|
|
$14,366 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
Senior debt (Note
8) |
|
|
|
|
|
|
Commercial paper and short-term
borrowings |
|
$ 5,202 |
|
|
$ 3,681 |
|
Notes and debentures |
|
8,630 |
|
|
6,768 |
|
|
|
|
|
|
|
|
Total debt |
|
13,832 |
|
|
10,449 |
|
Credit balances of
factoring clients |
|
993 |
|
|
1,441 |
|
Other payables and
accruals |
|
790 |
|
|
504 |
|
|
|
|
|
|
|
|
Total liabilities |
|
15,615 |
|
|
12,394 |
|
Minority
interest |
|
11 |
|
|
10 |
|
Stockholders equity
(Notes 12 and 13) |
|
|
|
|
|
|
Non-redeemable preferred stock (Note
12) |
|
400 |
|
|
400 |
|
Class A Common Stock ($.25 par;
500,000,000 shares authorized; 46,320,888 shares
issued and 45,953,214 shares outstanding) (Notes 2 and
14) |
|
12 |
|
|
10 |
|
Class B Common Stock ($.25 par;
300,000,000 shares authorized; 51,050,000 shares
issued and outstanding) (Note 2) |
|
13 |
|
|
13 |
|
Additional paid in capital |
|
1,626 |
|
|
1,435 |
|
Retained earnings |
|
332 |
|
|
111 |
|
Treasury stock (367,674) (Note
14) |
|
(9 |
) |
|
(8 |
) |
Accumulated other comprehensive
income |
|
(27 |
) |
|
1 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
2,347 |
|
|
1,962 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$17,973 |
|
|
$14,366 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Interest income |
|
$1,197 |
|
$1,047 |
|
$924 |
Interest
expense |
|
685 |
|
624 |
|
516 |
|
|
|
|
|
|
|
Net interest income |
|
512 |
|
423 |
|
408 |
Fees and other income
(Note 15) |
|
286 |
|
206 |
|
206 |
Factoring
commissions |
|
119 |
|
124 |
|
104 |
Income of international
joint ventures |
|
35 |
|
30 |
|
36 |
|
|
|
|
|
|
|
Operating revenues |
|
952 |
|
783 |
|
754 |
Operating expenses (Note
16) |
|
456 |
|
399 |
|
357 |
Provision for losses (Note
6) |
|
136 |
|
77 |
|
164 |
Gain on sale of Commercial
Services assets (Note 5) |
|
79 |
|
|
|
|
Restructuring charge (Note
17) |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Income before taxes and minority
interest |
|
439 |
|
290 |
|
233 |
Income tax provision (Note
19) |
|
154 |
|
93 |
|
66 |
Minority
interest |
|
1 |
|
4 |
|
9 |
|
|
|
|
|
|
|
Net income |
|
$ 284 |
|
$ 193 |
|
$158 |
|
|
|
|
|
|
|
Dividends on preferred
stock |
|
$ 28 |
|
$ 21 |
|
$ 14 |
|
|
|
|
|
|
|
Net income applicable to common
stock |
|
$ 256 |
|
$ 172 |
|
$144 |
|
|
|
|
|
|
|
Basic net income applicable to common
stock per share (Note 20) |
|
$ 2.75 |
|
$ 2.23 |
|
$2.82 |
|
|
|
|
|
|
|
Diluted net income applicable to
common stock per share (Note 20) |
|
$ 2.74 |
|
$ 2.23 |
|
$2.82 |
|
|
|
|
|
|
|
Pro forma basic net income applicable
to common stock per share (Note 20) |
|
$ 2.75 |
|
$ 1.92 |
|
$1.60 |
|
|
|
|
|
|
|
Pro forma diluted net income
applicable to common stock per share (Note 20) |
|
$ 2.74 |
|
$ 1.91 |
|
$1.60 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
OPERATING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net income |
|
$ 284 |
|
|
$ 193 |
|
|
$ 158 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
Provision for losses |
|
136 |
|
|
77 |
|
|
164 |
|
Losses from equity investments |
|
21 |
|
|
33 |
|
|
50 |
|
Amortization and depreciation |
|
46 |
|
|
25 |
|
|
23 |
|
Provision for deferred tax asset
(benefit) |
|
40 |
|
|
33 |
|
|
(19 |
) |
Increase in accounts payable and accrued
liabilities |
|
206 |
|
|
2 |
|
|
29 |
|
Undistributed income of international joint
ventures |
|
(21 |
) |
|
(20 |
) |
|
(19 |
) |
Increase in interest payable |
|
25 |
|
|
21 |
|
|
11 |
|
Other |
|
5 |
|
|
(4 |
) |
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities |
|
742 |
|
|
360 |
|
|
406 |
|
INVESTING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
Increase in longer-term loans |
|
|
|
|
|
|
|
|
|
Due to HCFP acquisition |
|
(535 |
) |
|
|
|
|
|
|
Due to Dealer Products Group
acquisition |
|
|
|
|
(579 |
) |
|
|
|
Due to fundings |
|
(7,334 |
) |
|
(6,486 |
) |
|
(5,311 |
) |
Collections of principal |
|
2,476 |
|
|
2,810 |
|
|
2,904 |
|
Loan sales, securitizations and syndications |
|
2,425 |
|
|
4,068 |
|
|
2,238 |
|
Net (increase) decrease in short-term loans and advances to
factoring clients |
|
|
|
|
|
|
|
|
|
Due to Sale of HCS assets |
|
334 |
|
|
|
|
|
|
|
Due to consolidation of Factofrance |
|
|
|
|
|
|
|
(1,018 |
) |
Other |
|
(1,066 |
) |
|
(874 |
) |
|
(526 |
) |
Investment in operating leases |
|
|
|
|
|
|
|
|
|
Due to Dealer Products Group
acquisition |
|
|
|
|
(35 |
) |
|
|
|
Other |
|
(278 |
) |
|
(170 |
) |
|
(119 |
) |
Investment in equity interests and other investments |
|
(447 |
) |
|
(536 |
) |
|
(369 |
) |
Goodwill and non-competition agreement from acquisitions |
|
(238 |
) |
|
(187 |
) |
|
(96 |
) |
Sales of investments and equipment on lease |
|
337 |
|
|
362 |
|
|
365 |
|
Other |
|
48 |
|
|
(54 |
) |
|
26 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for
investing activities |
|
(4,278 |
) |
|
(1,681 |
) |
|
(1,906 |
) |
FINANCING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
Senior note issues |
|
4,805 |
|
|
2,780 |
|
|
2,599 |
|
Retirement of notes and debentures |
|
(2,932 |
) |
|
(2,020 |
) |
|
(1,411 |
) |
Increase (decrease) in commercial paper and other short-term
borrowings |
|
|
|
|
|
|
|
|
|
Due to consolidation of Factofrance |
|
|
|
|
|
|
|
966 |
|
Other |
|
1,521 |
|
|
249 |
|
|
(279 |
) |
Net proceeds from preferred stock issuance |
|
|
|
|
122 |
|
|
147 |
|
Net proceeds from common stock issuance |
|
192 |
|
|
991 |
|
|
|
|
Repurchase of Class A Common Stock (Note 14) |
|
(2 |
) |
|
(8 |
) |
|
|
|
Net (increase) decrease in advances to affiliates |
|
6 |
|
|
(32 |
) |
|
49 |
|
Dividends paid on preferred and common stock |
|
(62 |
) |
|
(1,027 |
) |
|
(57 |
) |
Other |
|
(5 |
) |
|
(26 |
) |
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
financing activities |
|
3,523 |
|
|
1,029 |
|
|
2,025 |
|
Increase (decrease) in
cash and cash equivalents |
|
(13 |
) |
|
(292 |
) |
|
525 |
|
Cash and cash equivalents
at the beginning of the year |
|
529 |
|
|
821 |
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at the end of the year |
|
$ 516 |
|
|
$ 529 |
|
|
$ 821 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
|
|
Non-Re-
deemable
Preferred
Stock
(Note 12)
|
|
Class A
Common
Stock
(Note 2)
|
|
Class B
Common
Stock
(Note 2)
|
|
Treasury
Stock
(Note
14)
|
|
Addl
Paid
In
Capital
|
|
Accum.
Other
Compre-
hensive
Income
|
|
Retained
Earnings
|
|
Total
|
|
Compre-
hensive
Income
|
|
|
(in
millions) |
BALANCE AT DECEMBER 31,
1996 |
|
$125 |
|
|
|
$13 |
|
|
|
|
$ 675 |
|
|
$ (1 |
) |
|
$655 |
|
|
$1,467 |
|
|
|
|
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
|
158 |
|
|
$158 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities, net of tax
of $
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
(5 |
) |
Foreign currency translation adjustments, net of
tax
of $ (17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Noncumulative
Perpetual Senior
Preferred Stock, Series B |
|
150 |
|
|
|
|
|
|
|
|
(3) |
|
|
|
|
|
|
|
|
147 |
|
|
|
|
Preferred stock dividends
(Notes 12 and 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
(14 |
) |
|
|
|
Common stock dividends
(Note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69 |
) |
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31,
1997 |
|
$275 |
|
|
|
$13 |
|
|
|
|
$ 672 |
|
|
$(12 |
) |
|
$730 |
|
|
$1,678 |
|
|
|
|
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|
193 |
|
|
$193 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities, net of tax of
$7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
14 |
|
Foreign currency translation adjustments, net of
tax
benefit of $17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Noncumulative
Perpetual Senior
Preferred Stock, Series D |
|
125 |
|
|
|
|
|
|
|
|
(3) |
|
|
|
|
|
|
|
|
122 |
|
|
|
|
Issuance of Class A Common
Stock (Note 2) |
|
|
|
10 |
|
|
|
|
|
|
981 |
|
|
|
|
|
|
|
|
991 |
|
|
|
|
Repurchase of Class A
Common Stock (Note 14) |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
Preferred stock dividends
(Notes 12 and 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
(21 |
) |
|
|
|
Common stock dividends
(Notes 2 and 13) |
|
|
|
|
|
|
|
|
|
|
(215 |
) |
|
|
|
|
(791 |
) |
|
(1,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31,
1998 |
|
$400 |
|
$10 |
|
$13 |
|
$ (8 |
) |
|
$1,435 |
|
|
$ 1 |
|
|
$111 |
|
|
$1,962 |
|
|
|
|
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284 |
|
|
284 |
|
|
$284 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities, net of tax benefit
of
$8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
(15 |
) |
Foreign currency translation adjustments, net of
tax
of $ (56) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A Common
Stock (Note 2) |
|
|
|
2 |
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
192 |
|
|
|
|
Repurchase of Class A
Common Stock (Note 14) |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
(1 |
) |
|
(2 |
) |
|
|
|
Vesting of Restricted
Shares |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
1 |
|
|
|
|
Preferred stock dividends
(Notes 12 and 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
(28 |
) |
|
|
|
Common stock dividends
(Notes 2 and 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31,
1999 |
|
$400 |
|
$12 |
|
$13 |
|
$ (9 |
) |
|
$1,626 |
|
|
$(27 |
) |
|
$332 |
|
|
$2,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated other comprehensive income balance included $7
million, $22 million and $8 million of unrealized gains on securities
available for sale at December 31, 1999, 1998 and 1997, respectively.
Accumulated other comprehensive income also included deferred foreign
currency translation adjustments, net of tax, of $(34) million, $(21)
million and $(20) million at December 31, 1999, 1998 and 1997,
respectively.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of the Reporting Entity
Heller Financial, Inc. (including its consolidated subsidiaries,
Heller or the Company, which may be referred to as we, us
or our) furnishes commercial finance services to businesses in
the United States and invests in and operates commercial finance companies
throughout the world. We provide our products and services to mid-sized and
small businesses principally through two business segments, (1) Domestic
Commercial Finance and (2) International Factoring and Asset Based Finance.
The Domestic Commercial Finance segment is comprised of five business units:
(i) Heller Corporate Finance (Corporate Finance), (ii) Heller Real
Estate Financial Services (Real Estate Finance), (iii) Heller Leasing
Services (Leasing Services), (iv) Heller Small Business Finance
(Small Business Finance), and (v) Heller Healthcare Finance
(Healthcare Finance). Our International Factoring and Asset Based
segment, managed by our wholly-owned subsidiary, Heller International Group,
Inc. (International Group), provides international factoring and
asset based financing to medium size and small companies.
Prior to 1998, all of our common stock was owned by Heller
International Corporation (HIC), a wholly-owned subsidiary of The
Fuji Bank, Limited (Fuji Bank), of Tokyo, Japan. In addition, Fuji
Bank directly owned 21% of the outstanding shares of International Group. We
owned the remaining 79% of the outstanding shares of International
Group.
Effective January 1998, in order to combine its United States non-bank
operations under one holding company, Fuji Bank formed Fuji America
Holdings, Inc. (FAHI), and transferred ownership of the Company from
HIC to FAHI.
In May 1998, we issued 38,525,000 shares of Class A Common Stock in an
initial public offering (the Offering). During 1998, we also issued
509,019 shares of restricted Class A Common Stock to management. After the
Offering and the issuance of shares to management, there were 90,080,912
shares of common stock issued, resulting in FAHI owning 79% of the voting
interest and 57% of the economic interest of Hellers issued common
stock. See Note 2Initial Public Offeringfor more details.
In May 1998, we also purchased the 21% interest held by Fuji Bank in
International Group and we now own 100% of International Group.
In July 1999, we issued 7.3 million shares of Class A Common Stock in
conjunction with the HealthCare Financial Partners acquisition. See Note 4
HealthCare Financial Acquisitionfor more details. Our
issuance of common stock related to this transaction reduced FAHIs
ownership interest in Heller from 57% to 52%.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and our majority-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation. We account for investments in affiliated companies owned 50%
or less using the equity method. We have included certain temporary
interests in investments and carry those temporary investments at
cost.
Use of Estimates
Preparing financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions. These
estimates and assumptions may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
financial statement date and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits maintained in banks
and short-term debt securities with original maturities of less than 60
days.
Receivables
We present receivables net of unearned income, which generally
includes deferred loan origination and commitment fees and direct loan
origination costs. We also include in unearned income other amounts
attributed to the fair value of equity interests and other investments
received in connection with certain financings. We amortize the unearned
income to interest income using the effective interest method over the life
of the related loan, lease or commitment period.
We originate certain loans, which may be syndicated or portions sold
to participants, to manage borrower, industry or product concentrations. We
present these receivables net of unearned income. In the event we sell a
portion of a loan we had originated, any deferred fees or discounts relating
to the portion sold are recognized in interest income. For loan sales that
qualify as participations, we recognize income when the participation is
complete.
We review income recognition on an account by account basis. We
evaluate collateral regularly, primarily by assessing the related current
and future cash flow streams to estimate the value of the equipment, or by
assessing the value of the property underlying the receivable. We classify
loans as nonearning and we suspend all interest and unearned income
amortization when there is significant doubt as to the ability of the debtor
to meet current contractual terms. Numerous factors including loan covenant
defaults, deteriorating loan-to-value relationships, delinquencies greater
than 90 days, the sale of major income generating assets or other major
operational or organizational changes may lead to income suspension. We may
restore a nonearning account to earning status if all delinquent principal
and interest have been paid under the original contractual terms or the
account has been restructured and has demonstrated both the capacity to
service the amended terms of the debt and has adequate loan to value
coverage.
Allowance for Losses
We maintain an allowance for losses of receivables based upon our
estimate of probable losses inherent in our receivables portfolio at
year-end. The allowance for losses of receivables is established through
direct charges to income. We charge losses to the allowance when we deem all
or a portion of a receivable to be impaired and uncollectible as determined
by account management procedures. These procedures include assessing how the
borrower is affected by economic and market conditions, evaluating operating
performance and reviewing loan-to-value relationships. We measure impaired
receivables based on the present value of expected future cash flows
discounted at the receivables effective interest rate, at the
observable market price of the receivable or at the fair value of the
collateral if the receivable is collateral dependent. When the recorded
balance of an impaired receivable
exceeds the relevant measure of value, we record impairment through an
increase in the provision for losses.
We evaluate the allowance for losses on a quarterly basis. We review
nonearning assets and loans with certain loan grading characteristics to
determine if there is a potential risk of loss under varying performance
scenarios. We aggregate the potential loss estimates for these individual
loans and add them to a general allowance requirement, which reflects our
estimates of inherent losses within our lending portfolio. We base these
estimates on general economic factors, related industry performance,
historical losses and other judgmental factors. We then compare this total
allowance requirement to the existing allowance for losses and we make
adjustments, if necessary.
Securitized Receivables
We have securitized and sold to investors certain commercial mortgage,
equipment and small business loans and leases. In the securitization
process, originated loans are sold to trusts. The trusts then issue
asset-backed securities to investors. In accordance with Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, as
amended by Statement of Financial Accounting Standards No. 127, Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125,
collectively referred to as SFAS 125, after a transfer of financial
assets, an entity:
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recognizes the financial
and servicing assets it controls and the liabilities it has
incurred;
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derecognizes financial
assets when control has been surrendered; and
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derecognizes liabilities
when extinguished.
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SFAS 125 provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
Securitizations of finance receivables are accounted for as sales when legal
and effective control over the related receivables is surrendered. Servicing
assets or liabilities are recognized when the servicing rights are retained
by the seller and when servicing fees vary from market rates.
In accordance with SFAS 125, when we sell the loans in a
securitization, we recognize a gain for the difference between the net
proceeds received and the allocated carrying value of the receivables sold,
based on relative fair values. If we do not retain any interest in the
transaction and sell all of the securities to third party investors on a
nonrecourse basis, our gain equals the net proceeds on the transaction less
the carrying value of the securities sold. We classify retained securities
as debt securities available for sale. These interests are recorded at their
estimated fair market value based on estimated future cash flows discounted
at a market rate of interest and adjusted for any recourse obligations.
Assumptions used in estimating future cash flows are based on a combination
of our historical experience, current and forecasted trends and external
data. Retained securities are periodically reviewed for impairment. We
record any gain recognized in fees and other income. In general, we do not
establish servicing assets or liabilities because, in securitization
transactions to date, we have earned servicing fees that are considered
consistent with market rates.
Investments in Joint Ventures
Our investments in unconsolidated joint ventures represent investments
in companies with operations in 15 foreign countries. We use the equity
method of accounting for these investments. Under this method, we recognize
our share of the earnings or losses of the joint
venture in the period in which they are earned. We record these amounts as
income of international joint ventures in our consolidated statements of
income. Dividends received from joint ventures reduce the carrying amount of
the investment.
Investments
Equity Interests and InvestmentsWe carry at cost
investments in warrants, certain common and preferred stocks and certain
equity investments, which are not subject to the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. We periodically review the
valuation of all of these investments and we write down the investment
balance to reflect declines in value determined to be other than temporary.
We record any gains or losses recognized upon sale or write-down of these
investments as a component of fees and other income. We account for certain
other equity investments in limited partnership under the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock, and
record income on these investments based on financial information received
from fund managers.
Equipment on LeaseWe record aircraft and equipment
under operating lease at cost and depreciate them over their estimated
useful lives using the straight line method for financial reporting purposes
and accelerated methods for tax purposes. We report rental revenue over the
lease term as it is earned according to the provisions of the
lease.
Available for Sale and Held to Maturity SecuritiesWe
carry at fair value our available for sale securities using the specific
identification method. We record any unrealized gains or losses in
stockholders equity, net of related taxes. We record our held to
maturity securities at amortized cost. We may write down to fair value
available for sale and held to maturity securities to reflect declines in
value determined to be other than temporary. We include the amount of any
writedown in fees and other income.
Real Estate InvestmentsWe provide financing through
certain real estate loan arrangements that are recorded as acquisition,
development and construction investment transactions. We only recognize
income when we have received cash in excess of the investments
carrying amount.
Repossessed AssetsAssets that we have legally acquired in
satisfaction of receivables are carried at fair value less selling costs and
are included in other assets. After repossession, we expense operating costs
and apply cash receipts to reduce the asset balance.
GoodwillWe record as goodwill the excess of an entity
s acquisition cost over the fair value of the acquired entitys
net assets and any identifiable intangibles. We amortize goodwill on a
straight-line basis over the acquisitions expected beneficial period
not to exceed 25 years.
Income Taxes
From January 1998 through the date of the Offering, Heller was
included in FAHIs consolidated United States federal income tax
return. Subsequent to the Offering and in 1999, we filed our own United
States federal income tax return. We record future tax benefits as soon as
we believe the benefits will be realized.
International Group filed a separate United States federal income tax
return through April 1998. After that date, International Group is included
in Hellers consolidated United States federal income tax
return.
Derivative Financial Instruments
We use derivatives as an integral part of asset/liability management
to reduce the overall level of financial risk arising from normal business
operations. These derivatives are used to:
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diversify sources of
funding;
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alter interest rate
exposure arising from mismatches between assets and liabilities;
and
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manage exposure to
fluctuations in foreign exchange rates.
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We do not trade in derivative securities, nor do we use speculative
derivative products to generate earnings from changes in market
conditions.
Before entering into a derivative transaction, we determine that a
high correlation exists between the change in value of the hedged item and
the value of the derivative. At the inception of each transaction,
derivatives are designated or matched to specific assets, pools of assets or
liabilities. After inception of a hedge, asset/liability managers monitor
its effectiveness through an ongoing review of the amounts and maturities of
assets, liabilities and derivative positions. This information is reported
to our Financial Risk Management Committee (FRMC) whose members
include our Chairman, Chief Financial Officer and Treasurer. The FRMC
determines the direction the Company will take with respect to our financial
risk position and regularly reviews interest rate sensitivity, foreign
exchange exposure, funding needs and liquidity. Our financial risk position
and the related activities of the FRMC are reported regularly to the
Executive Committee of the Board of Directors and to the Board of
Directors.
We enter into interest rate swap agreements to modify the interest
characteristics of our outstanding assets and liabilities to limit exposure
to changes in interest rates. Our interest rate swap agreements are
designated as hedges of their underlying assets and liabilities. We
generally hold our interest rate swap agreements to maturity. Any
differential paid or received, as interest rates change, is accrued and
recognized as an adjustment in interest expense or interest income over the
agreements life. Any amount payable to or receivable from
counter-parties is recorded in other liabilities or other assets. Gains or
losses on terminated interest rate swaps that hedged underlying assets or
obligations are amortized to interest income or interest expense over the
remaining life of the underlying asset or obligation. If the underlying
asset or obligation is sold, we recognize the gain or loss related to
closing the swap currently in income.
We also periodically enter into forward currency exchange contracts.
These financial instruments serve as hedges of our foreign investment in
international subsidiaries and joint ventures. They also serve to
effectively hedge the translation of the related foreign currency income.
Through these contracts, we primarily sell the local currency and buy U.S.
dollars. Gains or losses on terminated forward currency exchange contracts,
which were hedges of net investments in a foreign subsidiary or joint
venture, continue to be deferred and are recognized when the international
investment is sold or substantially liquidated. Gains or losses resulting
from translation of foreign currency financial statements and the related
effects of the hedges of net investments in joint ventures and subsidiaries
outside the United States, are accumulated in stockholders equity, net
of related taxes, until the international investment is sold or
substantially liquidated. The change in fair value of contracts, which serve
to effectively hedge the translation of foreign currency income, is included
in the determination of net income.
Stock Based Compensation
We account for stock option and stock awards in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). In accordance with APB 25, no compensation
expense is recognized for stock options or awards issued under our stock
incentive plan as the exercise price of the stock options equaled the market
value on the grant dates.
The restricted stock we issued during 1999 and 1998 was recorded as
deferred compensation at the issue price or the fair market value on grant
date and is amortized to compensation expense on a straight-line basis over
the applicable vesting periods.
Reclassifications
We have reclassified certain prior year amounts to conform to the
current years presentation.
2. Initial Public Offering
In May 1998, we issued 38,525,000 shares of Class A Common Stock in an
initial public offering (the Offering). We received net proceeds of
$986 million. Of that amount, we repaid our indebtedness of a $450 million
subordinated note to FAHI. The note was issued February 24, 1998 for a
previously declared dividend to FAHI. We also used $533 million to pay a
cash dividend to FAHI. Our 51,050,000 outstanding Class B Common Shares are
held by FAHI. In addition, we issued 509,019 shares of restricted Class A
Common Stock to management during 1998.
The holders of our Class A Common Stock are entitled to one vote per
share. The holders of our Class B Common Stock are entitled to three votes
per share (except that the outstanding shares of Class B Common Stock may
never represent more than 79% of the combined voting power of all
outstanding shares of the Companys voting stock).
After the Offering and the issuance of shares to management, we had
90,080,912 shares of common stock issued resulting in FAHI owning 79% of the
voting interest and 57% of the economic interest of our issued common stock.
Prior to May 1998, FAHI owned 100% of our issued and outstanding common
stock. FAHIs ownership is now 52%.
In anticipation of an initial public offering, we amended our Restated
Certificate of Incorporation increasing the number of authorized shares of
Common Stock. We have the authority to issue up to 852 million shares of
stock including:
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2 million shares
designated as Preferred Stock with no par value;
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50 million shares
designated as Senior Preferred Stock with a par value of $0.01 per
share; and
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800 million shares
designated Common Stock with a par value of $0.25 per
share.
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Our Certificate of Incorporation, as amended, now authorizes two
classes of Common Stock, Class A Common Stock and Class B Common Stock. We
have retroactively reflected the authorization of the two classes of Common
Stock in our consolidated financial statements.
3. Acquisition of the Dealer Products Group
On November 30, 1998, we acquired, through our subsidiaries, the U.S.
assets of the Dealer Products Group of Dana Commercial Credit Corporation
and the stock of the Dealer Products Groups international subsidiaries
(collectively, Dealer Products Group) for $775 million. The purchase
price includes the assumption and repayment of approximately $260 million of
the international subsidiaries debt. The U.S. and international
subsidiaries of the Dealer Products Group provide customized leasing and
financing to commercial enterprises primarily for the acquisition of
computer and telecommunications equipment. The Dealer Products Group is a
recognized leader in the leasing industry and has operations in the United
States, Canada, United Kingdom, Germany, Switzerland and France.
We accounted for the acquisition using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
Business Combinations. Goodwill from the acquisition totaled $190
million and is being amortized over 25 years.
The following table presents unaudited pro forma combined income
statements of Heller and the Dealer Products Group for the years ended
December 31, 1999 and 1998. The pro forma combined income statements are
presented as if the acquisition had been effective January 1, 1998. The
combined historical results of operations of Heller and the Dealer Products
Group for 1999 and 1998 have been adjusted to reflect the amortization of
goodwill and the costs of financing for the transaction. We have presented
the following table for informational purposes only. It does not necessarily
indicate our future operating results or the operating results that would
have occurred had the acquisition been effective in the periods
presented.
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For the Year
Ended
December 31,
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1999
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1998
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|
(in millions)
(unaudited) |
Interest income |
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$1,197 |
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$1,116 |
Interest
expense |
|
685 |
|
663 |
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|
|
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Net interest income |
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512 |
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453 |
Fees and other
income |
|
286 |
|
217 |
Factoring
commissions |
|
119 |
|
124 |
Income of international
joint ventures |
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35 |
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30 |
|
|
|
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Operating revenues |
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952 |
|
824 |
Operating
expenses |
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456 |
|
435 |
Provision for
losses |
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136 |
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87 |
Gain on sale of Commercial
Services assets |
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79 |
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Restructuring
charge |
|
|
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17 |
|
|
|
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Income before income taxes and
minority interest |
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439 |
|
285 |
Income tax
provision |
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154 |
|
89 |
Minority
interest |
|
1 |
|
4 |
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Net income |
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$ 284 |
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$ 192 |
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4. HealthCare Financial Partners, Inc. Acquisition
On July 28, 1999 we acquired HealthCare Financial Partners, Inc.
(HCFP) for approximately $475 million. We paid 41% of the purchase
price in the form of our Class A Common Stock and 59% in cash. We issued
approximately 7.3 million Class A Common Shares for the transaction, which
reduced FAHIs ownership interest in Heller from 57% to
52%. In addition, we issued options to purchase 1.1 million shares of our
Class A Common Stock at prices ranging from $2 to $37 per share to replace
stock options previously held by HCFP employees for HCFP common stock. HCFP
is a rapidly growing commercial finance company exclusively focused on
providing secured financing to small- and mid-sized health care providers
throughout the United States.
We accounted for the acquisition using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
Business Combinations. Goodwill from the transaction totaled
approximately $235 million and will be amortized over 25 years. Our 1999
consolidated statement of income includes HCFPs operating results
since the acquisition date.
The following table presents the unaudited pro forma combined income
statements of the Company and HCFP for the year ended December 31, 1999 and
1998. The pro forma combined income statements are presented as if the
acquisition had been effective January 1, 1998. The combined historical
operating results of the Company and HCFP for 1999 and 1998 have been
adjusted to reflect goodwill amortization and financing costs for the
transaction. We have presented the following table for informational
purposes only. It does not necessarily indicate our future operating results
or the operating results that would have occurred had the acquisition been
effective in the periods presented.
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For the
Year Ended
December 31,
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1999
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1998
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(in millions)
(unaudited) |
Interest income |
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$1,239 |
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$1,105 |
Interest
expense |
|
694 |
|
640 |
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|
|
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Net interest income |
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545 |
|
465 |
Fees and other
income |
|
289 |
|
212 |
Factoring
commissions |
|
119 |
|
124 |
Income of international
joint ventures |
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35 |
|
30 |
|
|
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Operating revenues |
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988 |
|
831 |
Operating
expenses |
|
477 |
|
421 |
Provision for
losses |
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142 |
|
81 |
Gain on sale of Commercial
Services assets |
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79 |
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Restructuring
charge |
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17 |
|
|
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Income before income taxes and
minority interest |
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448 |
|
312 |
Income tax
provision |
|
157 |
|
102 |
Minority
interest |
|
1 |
|
4 |
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Net income |
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$ 290 |
|
$ 206 |
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5. Commercial Services Sale
On December 1, 1999, we sold the assets of our Commercial Services
unit, part of our Domestic Commercial Finance segment for approximately $454
million in cash. The sale consisted of $911 million of factored accounts
receivable and the assumption of $577 million of liabilities due to
factoring clients.
The premium on the transaction to Heller was reduced by $41 million of
costs incurred to exit the domestic factoring business. Of this amount, $21
million was related to severance benefits and other related compensation
costs incurred for termination of approximately 19%
of our domestic employees. In addition, we incurred expenses for transaction
costs, termination of third party contracts such as facility leases and
vendor contracts, asset impairment charges, recourse provisions and certain
other costs directly attributable to the sale. The transaction resulted in a
pre-tax gain of $79 million and an after tax gain of $48
million.
Upon completion of the sale, we terminated our domestic factored
accounts receivable sale facility.
Of the total costs incurred in this transaction, $21 million is
recorded as a liability of Heller as of December 31, 1999, including $15
million for severance benefits and other related compensation costs. Most of
these costs will be paid out by June 2000.
6. Lending Assets
Lending assets includes receivables and repossessed
assets.
At December 31, 1999 we had domestic commercial finance receivables of
$12 billion and international factoring and asset based finance receivables
of $2.8 billion. The international receivables included factored accounts
receivable of $2.4 billion relating to Factofrance and $400 million from our
other foreign consolidated subsidiaries. Total receivables at December 31,
1998 consist of $9.5 billion of domestic receivables and $2.4 billion of
foreign receivables.
Diversification of Credit Risk
Concentrations of lending assets of 5% or more at December 31, 1999
and 1998, based on the standard industrial classification of the borrower,
are as follows:
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December
31,
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1999
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1998
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Amount
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Percent
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Amount
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Percent
|
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(dollars in
millions) |
Automotive |
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$1,325 |
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9 |
% |
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$667 |
|
6 |
% |
Computers |
|
938 |
|
6 |
|
|
811 |
|
7 |
|
Department and general
merchandise retail stores |
|
877 |
|
6 |
|
|
935 |
|
8 |
|
Health services |
|
864 |
|
6 |
|
|
202 |
|
2 |
|
Transportation |
|
661 |
|
4 |
|
|
666 |
|
6 |
|
Food, grocery and
miscellaneous retail |
|
642 |
|
4 |
|
|
650 |
|
5 |
|
General industrial
machines |
|
599 |
|
4 |
|
|
732 |
|
6 |
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The automotive category is primarily comprised of:
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auto parts distributors
and wholesalers;
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resale and leasing
services in the automotive and aircraft industries; and
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maintenance services for
automotive and aircraft parts.
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The computers category consists of the following
classifications:
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software/hardware
distributors and manufacturers;
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plastic component
manufacturers; and
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The department and general merchandise retail stores category is
primarily comprised of factored accounts receivable which represent
short-term trade receivables from numerous
customers. The total of this category decreased in 1999 due to the sale of the
assets of our Commercial Services unit.
The health services category is primarily comprised of revolving and
term facilities with small- and mid-sized health care providers. The
increase in this category from 1998 is due to the acquisition of
HCFP.
The lending assets in the transportation category primarily arise from
chartered aircraft services and transportation services of freight, cargo,
and various packages.
The majority of lending assets in the food, grocery and miscellaneous
retail category are revolving and term facilities with borrowers primarily
in the business of manufacturing and retailing of food products.
The general industrial machines classification is distributed among
machinery used for many different industrial applications.
Contractual Maturity of Loan Receivables
The following table presents the contractual maturities of our
receivables at December 31, 1999. This information should not be regarded as
a forecast of cash flows (in millions):
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2000
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2001
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2002
|
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2003
|
|
2004
|
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After
2004
|
|
Total
|
Commercial
loans |
|
$ 933 |
|
$ 743 |
|
$ 949 |
|
$ 739 |
|
$ 775 |
|
$2,568 |
|
$ 6,707 |
Real estate
loans |
|
289 |
|
340 |
|
563 |
|
121 |
|
123 |
|
969 |
|
2,405 |
Factored accounts
receivable |
|
2,708 |
|
|
|
|
|
|
|
|
|
|
|
2,708 |
Equipment loans and
leases |
|
552 |
|
532 |
|
438 |
|
352 |
|
339 |
|
762 |
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$4,482 |
|
$1,615 |
|
$1,950 |
|
$1,212 |
|
$1,237 |
|
$4,299 |
|
$14,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Commercial loans consist principally of senior loans secured by
receivables, inventory or property plant and equipment. Real estate loans
are principally collateralized by first mortgages on commercial and
residential real estate. Factored accounts receivable are purchased from
clients and we provide credit and collection services in return for a
commission. Equipment loans and leases are secured by the underlying
equipment and we may have at least partial recourse to the equipment vendor.
Of the loans maturing after 2000, $3.7 billion have fixed interest rates and
$6.6 billion have floating interest rates.
Impaired Receivables, Repossessed Assets,
and Troubled Debt Restructurings
We do not recognize interest and fee income on impaired receivables or
repossessed assets, both of which are classified as nonearning, as set forth
in the following table:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
Impaired
receivables |
|
$204 |
|
|
$208 |
|
Repossessed
assets |
|
24 |
|
|
3 |
|
|
|
|
|
|
|
|
Total nonearning assets |
|
$228 |
|
|
$211 |
|
|
|
|
|
|
|
|
Ratio of total nonearning
assets to total lending assets |
|
1.5 |
% |
|
1.8 |
% |
Nonearning assets included $32 million and $26 million in 1999 and
1998, respectively, for our International Factoring and Asset Based Finance
Segment.
The average investment in nonearning impaired receivables was $214
million, $160 million and $236 million for the years ended December 31,
1999, 1998 and 1997, respectively.
We had $14 million of loans that are considered troubled debt
restructurings at December 31, 1999 and December 31, 1998.
The following table indicates the effect on income if interest on
nonearning impaired receivables and troubled debt restructurings outstanding
at year-end had been recognized at original contractual rates during the
year:
|
|
For the Year
Ended
|
|
For the Year
Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
|
|
Domestic
|
|
Foreign
|
|
|
(in
millions) |
Interest income which
would have been
recorded |
|
$12 |
|
$15 |
|
$16 |
|
$20 |
|
$15 |
|
$12 |
Interest income
recorded |
|
2 |
|
4 |
|
3 |
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on interest
income |
|
$10 |
|
$11 |
|
$13 |
|
$20 |
|
$15 |
|
$11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Modifications
At December 31, 1999, there were no loans that were restructured and
returned to earning status.
Allowance for Losses
The changes in the allowance for losses of receivables and repossessed
assets were as follows:
|
|
For the Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Balance at the beginning
of the year |
|
$271 |
|
|
$261 |
|
|
$225 |
|
Provision for losses |
|
136 |
|
|
77 |
|
|
164 |
|
Writedowns |
|
(116 |
) |
|
(145 |
) |
|
(169 |
) |
Recoveries |
|
18 |
|
|
64 |
|
|
23 |
|
Factofrance consolidation |
|
|
|
|
|
|
|
18 |
|
Dealer Products Group
acquisition |
|
|
|
|
18 |
|
|
|
|
HCFP acquisition |
|
7 |
|
|
|
|
|
|
|
Sale of HCS assets |
|
(2 |
) |
|
|
|
|
|
|
Transfers and other |
|
2 |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the
year |
|
$316 |
|
|
$271 |
|
|
$261 |
|
|
|
|
|
|
|
|
|
|
|
Impaired receivables with identified reserve requirements were $177
million and $136 million at December 31, 1999 and 1998,
respectively.
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
Identified reserve
requirements for impaired receivables |
|
$ 44 |
|
|
$ 44 |
|
Additional allowance for
losses of receivables |
|
272 |
|
|
227 |
|
|
|
|
|
|
|
|
Total allowance for losses of receivables |
|
$316 |
|
|
$271 |
|
|
|
|
|
|
|
|
Ratio of total allowance
for losses of receivables to nonearning
impaired receivables |
|
155 |
% |
|
130 |
% |
7. Investments and Other Assets
Equity and Real Estate Investments
The following table sets forth a summary of the major components of
our equity and real estate investments (in millions):
|
|
December
31,
|
|
|
1999
|
|
1998
|
Real estate
investments |
|
$235 |
|
$271 |
Equity interests and
investments |
|
418 |
|
258 |
Available for sale equity
securities |
|
84 |
|
88 |
|
|
|
|
|
Total equity and real estate
investments |
|
$737 |
|
$617 |
|
|
|
|
|
Real estate investments are acquisition, development and construction
investment transactions. At December 31, 1999, we held investments in 173
projects with balances ranging up to approximately $9 million.
Equity interests and investments principally include common stock,
preferred stock, warrants and investments in limited
partnerships.
The available for sale equity securities are principally comprised of
shares of common stock. Net unrealized holding gains on these securities
were $30 million and $52 million at December 31, 1999 and 1998,
respectively, and are recorded in stockholders equity on a net of tax
basis.
Debt Securities
The Companys debt securities are all available for sale debt
securities and include purchased investments in debt securities and $107
million of securities retained in connection with our various
securitizations. Of the securities retained in connection with our
securitizations, $95 million are rated BB or higher and no
losses have been realized on any of the retained securities to date. Net
unrealized holding losses on total available for sale debt securities were
$23 million and $17 million at December 31, 1999 and 1998, respectively.
These amounts are recorded in stockholders equity on a net of tax
basis.
Operating Leases
Equipment on lease is primarily comprised of aircraft and related
equipment. Noncancellable future minimum rental receipts under the leases
are $38 million, $29 million,
$21 million, $16 million and $8 million for 2000 through 2004. All aircraft
and related equipment was under lease as of December 31, 1999.
Investments in International Joint Ventures
The following table sets forth a summary of the financial results of
our international joint ventures on a combined basis:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
Total
receivables |
|
$ 4,609 |
|
$ 3,625 |
Factoring
volume |
|
25,243 |
|
24,201 |
Net income |
|
50 |
|
52 |
The following table shows our investment in international joint
ventures by geographic region:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
Europe |
|
$187 |
|
$194 |
Latin America |
|
11 |
|
21 |
Asia/Pacific |
|
17 |
|
16 |
North America |
|
4 |
|
4 |
|
|
|
|
|
Total |
|
$219 |
|
$235 |
|
|
|
|
|
We own interests of 40% to 50% in these joint ventures. Our largest
investment in international joint ventures is NMB-Heller Holding N.V. which
accounts for 59% of our total investments in international joint ventures at
December 31, 1999. NMB-Heller Holding N.V. operates finance companies
primarily located in the Netherlands, Germany and the United Kingdom. Our
investment in NMB-Heller Holding N.V. totaled $129 million and $131 million
at December 31, 1999 and 1998, respectively. NMB-Heller Holding N.V. had
total receivables of $2.9 billion and $2.8 billion as of December 31, 1999
and 1998 and revenues of $181 million and $180 million for the years then
ended.
Goodwill
The following table presents goodwill balances, net of amortization,
relating to our acquisitions:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(dollars in
millions) |
HCFP |
|
$231 |
|
|
Dealer Products
Group |
|
181 |
|
$187 |
Factofrance |
|
62 |
|
76 |
Other |
|
7 |
|
6 |
|
|
|
|
|
Total goodwill |
|
$481 |
|
$269 |
|
|
|
|
|
Amortization for the years ended December 31, 1999 and 1998 totaled
$15 million and $4 million, respectively.
Other Assets
The following table sets forth a summary of the major components of
other assets:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Other Assets: |
Deferred income tax benefits, net of
allowance of $5 at December 31, 1999 and 1998,
respectively |
|
$194 |
|
$229 |
Prepaid expenses and other
assets |
|
203 |
|
106 |
Furniture, fixtures and
equipment |
|
55 |
|
59 |
Non-compete agreement |
|
8 |
|
12 |
Repossessed assets |
|
24 |
|
3 |
Net advances to affiliates |
|
|
|
3 |
|
|
|
|
|
Total other assets |
|
$484 |
|
$412 |
|
|
|
|
|
Our noncash investing activities include $21 million and $4 million of
receivables which were classified as repossessed assets during the periods
ended December 31, 1999 and 1998, respectively. See Note 19 for additional
information on deferred income tax benefits.
8. Senior Debt
Commercial paper and short-term borrowingsWe use
commercial paper to finance our domestic operations. Our consolidated
international subsidiaries use short-term borrowings and commercial paper to
finance international operations. Total commercial paper borrowings
represent 29% of total debt at December 31, 1999. Combined commercial paper
and short-term borrowings represent 38% of total debt at December 31,
1999.
The following table summarizes our commercial paper and short-term
borrowings as of December 31, 1999 and 1998:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Domestic commercial
paper |
|
$3,563 |
|
$2,450 |
Factofrance commercial
paper |
|
397 |
|
242 |
Factofrance short-term
borrowings |
|
989 |
|
858 |
Other consolidated
subsidiaries short-term borrowings |
|
253 |
|
131 |
|
|
|
|
|
Commercial paper and short-term
borrowings |
|
$5,202 |
|
$3,681 |
|
|
|
|
|
The table below sets forth information concerning our domestic
commercial paper borrowings. The average interest rates and average
borrowings are computed based on the average daily balances during the year.
We issue commercial paper with maturities ranging up to 270
days.
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
Commercial Paper
domestic: |
Average interest rate |
|
|
|
|
|
|
|
|
|
During the year |
|
5.32 |
% |
|
5.71 |
% |
|
5.67 |
% |
During the year, including the effect of
commitment fees |
|
5.47 |
|
|
5.83 |
|
|
5.78 |
|
At year-end, including the effect of commitment
fees |
|
6.13 |
|
|
5.59 |
|
|
5.99 |
|
Average borrowings |
|
$3,346 |
|
|
$2,619 |
|
|
$2,917 |
|
Maximum month-end borrowings |
|
4,194 |
|
|
2,974 |
|
|
3,264 |
|
End of period borrowings |
|
3,563 |
|
|
2,450 |
|
|
2,279 |
|
Factofrance commercial paper issued at December 31, 1999 had an
average interest rate of 3.36% and its short-term borrowings at December 31,
1999 had an average interest rate of 3.41%. Factofrance uses primarily
short-term debt and commercial paper to fund its assets which are short-term
in nature.
Available credit and asset sale facilitiesAt December 31,
1999, we have total committed credit and asset sale facilities of $5.7
billion, of which $5.4 billion was available for use at December 31,
1999.
The amount of committed facilities includes approximately $4.1 billion
in available liquidity support under four bank credit facilities. The
longest facility is a multi-year agreement for $1.6 billion that expires in
April 2002. Two of our three separate 364-day bank credit facilities expire
in April 2000 and the third in September 2000. Each of these facilities
includes a term loan option that expires one year after the option exercise
date. The terms of the bank credit facilities require us to maintain
stockholders equity of $1 billion. Under the terms of the debt
covenants of the agreements, we could have borrowed an additional $8.6
billion of debt at December 31, 1999.
Also included in committed facilities is $379 million of additional
alternative liquidity, which is available by discounting eligible French
receivables with the French Central Bank since Factofrance is a registered
financial institution in France. At December 31, 1999, $280 million was
available for use under this facility.
We also have included in our committed facilities a 364-day facility,
expiring December 2000, which allows us to sell up to $400 million of our
equipment receivables to two bank-sponsored conduits, on a limited recourse
basis. As of December 31, 1999, we have not sold any receivables under this
facility.
In addition to the above facilities, we have committed foreign bank
credit facilities in excess of $800 million (U.S. dollar equivalent) for our
international subsidiaries. As of December 31, 1999, there was $661 million
available under these facilities.
Our wholly-owned subsidiary, Factofrance, has a factored accounts
receivable sale facility. This facility allows Factofrance to sell an
undivided interest of up to 1 billion French francs in a designated pool of
its factored accounts receivable to one bank-sponsored conduit on a limited
recourse basis. As of December 31, 1999, approximately 1 billion French
francs (or $165 million) of receivables were sold under this
facility.
We have a shelf registration statement, filed with the SEC, permitting
the offering of up to $5 billion in debt securities (including medium term
notes), senior preferred stock and Class A Common Stock. As of December 31,
1999, there was $89 million available under this shelf
registration.
In August 1999, we filed with the SEC a shelf registration statement
covering the sale of up to $10 billion in debt securities (including medium
term notes), senior preferred stock and Class A Common Stock. As of December
31, 1999, there was $10 billion available under this shelf
registration.
In
October 1999, we established a Euro Medium-Term Note Program for the
issuance of up to $2 billion in notes to be issued from time to time. Also
in October 1999, we increased the size of our Euro commercial paper program
to $1 billion and established a $250 million Canadian commercial paper
program.
In
November 1999, we issued $600 million of 7.375% notes due November 1, 2009
in a privately placed transaction under SEC Rule 144A and Regulation S. See
footnote 26Subsequent Eventsfor information on our
February 2000 filing of a registration statement with the SEC to exchange
these notes.
Notes and debenturesThe scheduled maturities of debt
outstanding at December 31, 1999, other than commercial paper and short-term
borrowings, and gross of the net unamortized discount of $6 million, are as
follows:
|
|
Scheduled Maturities at
December 31,
|
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
After
2004
|
|
Total
|
|
|
(dollars in
millions) |
Various fixed rate notes
and debentures |
|
$1,336 |
|
|
$ 905 |
|
|
$1,048 |
|
|
$ 53 |
|
|
$875 |
|
|
$600 |
|
|
$4,817 |
|
Fixed weighted average rate |
|
5.46 |
% |
|
6.06 |
% |
|
6.54 |
% |
|
6.04 |
% |
|
6.28 |
% |
|
7.38 |
% |
|
6.20 |
% |
Various floating rate
notes and debentures |
|
$1,477 |
|
|
$1,527 |
|
|
$ 276 |
|
|
$469 |
|
|
$ 45 |
|
|
$ 25 |
|
|
$3,819 |
|
Floating weighted average rate |
|
6.18 |
% |
|
6.42 |
% |
|
6.36 |
% |
|
6.13 |
% |
|
6.61 |
% |
|
6.42 |
% |
|
6.29 |
% |
Total notes and
debentures |
|
$2,813 |
|
|
$2,432 |
|
|
$1,324 |
|
|
$522 |
|
|
$920 |
|
|
$625 |
|
|
$8,636 |
|
Our
various fixed and floating rate notes and debentures are denominated in U.S.
dollars, Japanese yen and French francs. In order to fix the exchange rate
of Japanese yen to U.S. dollars on the yen denominated debt, we have entered
into cross currency interest rate swap agreements. In order to convert
certain fixed rate debt to floating rate debt and vice-versa, we have
entered into interest rate swap agreements. The following table provides the
year-end weighted average interest rate of the U.S. dollar and Japanese yen
denominated debt, gross of the net unamortized discount of $6 million before
and after the effect of the swap agreements. We have $17 million of French
franc denominated fixed rate debt and $87 million of French franc
denominated variable rate debt which support French franc denominated
assets.
|
|
Weighted Average
Interest Rate
|
|
|
Fixed Debt
Outstanding
|
|
Before
Effect
of
Swap
|
|
After
Effect
of
Swap
|
|
Variable
Debt
Outstanding
|
|
Before
Effect
of
Swap
|
|
After
Effect
of
Swap
|
|
Total Debt
Outstanding
|
|
|
(dollars in
millions) |
1999: |
United States dollar |
|
$4,494 |
|
6.40 |
% |
|
6.63 |
% |
|
$3,732 |
|
6.35 |
% |
|
6.42 |
% |
|
$8,226 |
Japanese yen |
|
306 |
|
3.26 |
|
|
6.24 |
|
|
|
|
|
|
|
|
|
|
306 |
Total |
|
$4,800 |
|
6.20 |
% |
|
6.61 |
% |
|
$3,732 |
|
6.35 |
% |
|
6.42 |
% |
|
$8,532 |
1998: |
United States dollar |
|
$3,554 |
|
6.58 |
% |
|
6.24 |
% |
|
$2,739 |
|
5.41 |
% |
|
5.59 |
% |
|
$6,293 |
Japanese yen |
|
306 |
|
3.26 |
|
|
5.45 |
|
|
|
|
|
|
|
|
|
|
306 |
Total |
|
$3,860 |
|
6.32 |
% |
|
6.17 |
% |
|
$2,739 |
|
5.41 |
% |
|
5.59 |
% |
|
$6,599 |
The
contractual interest rates for the U.S. dollar denominated fixed rate debt
range between 5.48% and 7.38% at December 31, 1999. The contractual rates on
the U.S. dollar denominated floating rate debt are based primarily on
indices such as the Federal Funds rate plus 0.25%, the one-month London
Inter-Bank Offered Rate (LIBOR) plus 0.11%, three-month LIBOR
plus 0.10% to 0.90%, six-month LIBOR plus 0.25% or the Prime rate less 2.55%
to 2.60%.
9. Financial Instruments with Off-Balance Sheet
Risk
We are
party to several types of agreements involving financial instruments with
off-balance sheet risk. These instruments are used to meet the financing
needs of borrowers and to manage our own exposure to interest rate and
currency exchange rate fluctuations. These instruments principally include
interest rate swap agreements, forward currency exchange contracts, options,
futures contracts, interest rate cap agreements, loan commitments, letters
of credit and guarantees.
Derivative financial instruments used for
risk management purposes
We use derivatives as an integral part of asset/liability management
to reduce our overall level of financial risk. These derivatives,
particularly interest rate swap agreements, are used to:
|
|
diversify sources of
funding;
|
|
|
alter interest rate
exposure arising from mismatches between assets and liabilities;
and
|
|
|
manage exposure to
fluctuations in foreign exchange rates.
|
Our derivative instruments are entirely related to accomplishing
these risk management objectives, which arise from normal business
operations. We are not an interest rate swap dealer nor are we a trader in
derivative securities. We have not used speculative derivative products to
generate earnings from changes in market conditions.
Before entering into a derivative agreement, we determine that an
inverse correlation exists between the value of the hedged item and the
value of the derivative. At the inception of each agreement, derivatives are
designated or matched to specific assets, pools of assets or liabilities.
After inception of a hedge, asset/liability managers monitor its
effectiveness through an ongoing review of the amounts and maturities of
assets, liabilities and swap positions. This information is reported to our
Financial Risk Management Committee (FRMC) whose members include our
Chairman, Chief Financial Officer and Treasurer. The FRMC determines the
direction the Company will take with respect to its asset/liability
position. Our asset/liability position and the related activities of the
FRMC are reported regularly to the Executive Committee of the Board of
Directors and to the Board of Directors.
The following table summarizes the notional amounts of our interest
rate swap agreements, foreign exchange contracts and interest rate cap
agreements as of December 31, 1999 and 1998. The credit risk associated with
these instruments is limited to
|
|
amounts earned but not
collected and
|
|
|
any additional amounts we
may incur to replace the instrument under current market
conditions.
|
These amounts will increase or decrease during the life of the
instruments as interest rates and foreign exchange rates fluctuate. The
amounts are substantially less than the notional amounts of these
agreements. We manage this risk by establishing minimum credit ratings for
each counter-party. We also limit the exposure to individual counter-parties
based upon the total notional amount and the current replacement cost of
existing agreements. We have not experienced nonperformance by any
counter-party related to our derivative financial instruments.
|
|
Contract or
Notional Amount
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Interest rate swap
agreements |
|
$7,662 |
|
$4,620 |
Cross currency interest
rate swap agreements |
|
470 |
|
616 |
Basis swap
agreements |
|
2,376 |
|
2,471 |
Forward currency exchange
contracts |
|
1,421 |
|
820 |
Purchased
options |
|
29 |
|
|
Interest rate cap
agreements |
|
24 |
|
20 |
Interest rate futures
contracts |
|
220 |
|
|
We utilize interest rate swaps primarily to convert fixed rate
financings to variable rate debt. We may also utilize cross currency
interest rate swaps when the issuance of debt denominated in a foreign
currency is deemed more cost effective. This type of swap converts foreign
currency denominated debt to U.S. dollar denominated debt and U.S. based
indices. We also use swap agreements to alter the characteristics of
specific asset pools to more closely match the interest terms of the
underlying financing. These agreements enhance the correlation of the
interest rate and currency characteristics of our assets and liabilities and
mitigate our exposure to interest rate volatility. Basis swap agreements
involve the exchange of two different floating rate interest payment
obligations. We use these types of agreements to manage the risk between
different floating rate indices.
Forwards are contracts for the delivery of an item in which the buyer
agrees to take delivery of an instrument or currency at a specified price
and future date. We will periodically enter into forward currency exchange
contracts or purchase options. These instruments serve as hedges of our
investment in international subsidiaries and joint ventures or effectively
hedge the translation of the related foreign currency income. We also
periodically enter into forward contracts to hedge receivables denominated
in foreign currencies or may purchase foreign currencies in the spot market
to settle a foreign currency denominated liability.
Commitments, letters of credit and guaranteesWe generally
enter into various commitments, letters of credit and guarantees in response
to our customers financing needs. Since we expect many of these agreements
to expire unused, the total commitment amount does not necessarily represent
future cash requirements. The credit risk involved in issuing these
instruments is similar to extending loans to borrowers. Our credit quality
and collateral policies for controlling this risk are similar to those
involved in our normal lending transactions. Our contractual amount of
commitments, letters of credit and guarantees are shown below:
|
|
Contract
Amount
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Loan
commitments |
|
$2,587 |
|
$2,188 |
Letters of credit and
financial guarantees |
|
582 |
|
709 |
Factoring credit
guarantees |
|
|
|
286 |
Investment
commitments |
|
147 |
|
123 |
Commitments to fund new and existing borrowers generally have fixed
expiration dates and termination clauses and typically require payment of a
fee. We issue letters of credit and financial guarantees as conditional
commitments to guarantee the performance of a borrower or an affiliate to a
third party. For factoring credit guarantees, we receive a fee for
guaranteeing the collectibility of certain factoring clients accounts
receivable. Under this arrangement, clients generally retain the
responsibility for collection and bookkeeping. Losses related to these
services historically have not been significant. Due to the sale of HCS, we
had no factoring credit guarantees outstanding at December 31,
1999.
10. Legal Proceedings
We are party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of its business. Although our
ultimate amount of liability, if any, is not ascertainable, we believe that
the amounts, if any, which may ultimately be funded or paid will not have a
material adverse effect on our financial condition or results of
operations.
11. Rental Commitments
Our minimum rental commitments under non-cancelable operating leases
and other service agreements at December 31, 1999 are as follows (in
millions):
2000 |
|
$ 23 |
2001 |
|
21 |
2002 |
|
21 |
2003 |
|
19 |
2004 |
|
17 |
Thereafter |
|
31 |
|
|
|
|
|
$132 |
|
|
|
Total rent expense, net of rental income from subleases, was $37
million, $34 million and $30 million for the years ended December 31, 1999,
1998 and 1997, respectively.
12. Preferred Stock
The following table summarizes our non-redeemable preferred
stock:
|
|
As of
December 31,
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Cumulative Perpetual
Senior Preferred Stock, Series A |
|
$125 |
|
$125 |
Noncumulative Perpetual
Senior Preferred Stock, Series C |
|
150 |
|
150 |
Noncumulative Perpetual
Senior Preferred Stock, Series D |
|
125 |
|
125 |
|
|
|
|
|
Total Preferred Stock |
|
$400 |
|
$400 |
|
|
|
|
|
Cumulative Perpetual Senior Preferred Stock, Series A ($.01 Par
Value; stated value, $25; 8.125%; 5,000,000 shares authorized and
outstanding)Our Cumulative Perpetual Senior Preferred Stock,
Series A (Series A Preferred Stock) is not redeemable prior to
September 22, 2000. On or after this date, we can redeem, in whole or in
part, the Series A Preferred Stock at a redemption price of $25 per share,
plus accrued and unpaid dividends. This stock has an annual dividend rate of
8.125%. Dividends are cumulative and payable quarterly. The Series A
Preferred Stock ranks senior with respect to the payment of dividends and
liquidation to our other preferred stock.
Noncumulative Perpetual Senior Preferred Stock, Series C ($.01 Par
Value; stated value, $100; 6.687%; 1,500,000 shares authorized and
outstanding)Our Series C Preferred Stock is not redeemable prior
to August 15, 2007. On or after this date, we can redeem, in whole or in
part, the Series C Preferred Stock at a redemption price of $100 per share,
plus any accrued and unpaid dividends. The Series C Preferred Stock has an
annual dividend rate of 6.687%.
Noncumulative Perpetual Senior Preferred Stock, Series D ($.01 Par
Value; stated value, $100; 6.95%; 1,250,000 shares authorized and
outstanding)In December 1998, we publicly issued 1,250,000 shares
of 6.95% Noncumulative Perpetual Senior Preferred Stock, Series D (Series
D Preferred Stock). This stock was issued at $100 per share and we
received proceeds of $125 million less underwriting costs of two percent.
The Series D Preferred Stock is not redeemable prior to February 15, 2009.
On or after this date, we can redeem, in whole or in part, the Series D
Preferred Stock at a redemption price of $100 per share, plus any accrued
and unpaid dividends.
Redeemable Preferred StockWe have authorized the
issuance of 100,000 shares of a series of preferred stock designated NW
Preferred Stock, Class B (No Par Value) (NW Preferred Stock). This
stock was authorized pursuant to the Keep Well Agreement between us and Fuji
Bank. The agreement is dated April 23, 1983 and was subsequently amended
(the Keep Well Agreement). The amendments include, among other
things, Fuji Banks agreement to purchase NW Preferred Stock in an
amount required to maintain our stockholders equity at $500 million.
As of December 31, 1999, our stockholders equity was $2.3 billion. If
and when issued, we will pay quarterly dividends on the NW Preferred Stock
at a rate per annum equal to 1% over the three-month LIBOR. Subject to
certain conditions, the holder can redeem the NW Preferred Stock within a
specified time period after a calendar quarter end. The redemption amount
must not exceed the amount of our stockholders equity over $500
million. The redemption price will equal the price paid for the stock plus
accumulated dividends. No purchases of NW Preferred Stock have been made by
Fuji Bank under the Keep Well Agreement.
13. Dividend Restrictions and Payments
Under the provisions of the Delaware General Corporation Law, we may
legally pay dividends only out of our surplus or our net profits for either
the current or preceding fiscal year, or both. In addition, we are
prohibited from paying dividends on Common Stock unless all current and full
cumulative dividends on the Series A Preferred Stock and the current
dividends on the Series C and Series D Preferred Stock have been paid. Also,
we are prohibited from paying dividends on any other preferred stock that
ranks, with respect to the payment of dividends, equal or junior to the
Series A, Series C and Series D Preferred Stock, unless all current and full
cumulative dividends on these preferred stocks have been paid.
We declared and paid dividends on the Series A Preferred Stock of $10
million and $11 million in 1999 and 1998, respectively. We declared and paid
dividends on the Series C Preferred Stock of $10 million and $10 million in
1999 and 1998, respectively. We also declared and paid dividends on the
Series D Preferred Stock of $8 million in 1999.
We paid Common Stock dividends in 1999 of $34 million ratably to our
Class A and Class B shareholders. During the fourth quarter of 1999, we
increased the quarterly dividend on each share of our Class A and Class B
Common Stock to $0.10 per share from $0.09 per share. In 1998, we paid
Common Stock dividends of over $1 billion. These dividends included $450
million paid in the form of a subordinated note dated February 24, 1998 and
$533 million paid in May 1998 subsequent to our Offering.
14. Treasury Stock
We have an executive deferred compensation plan (the Plan) into
which certain employees can elect to defer a portion of their annual
compensation on a pre-tax basis. The amount deferred remains an asset of
Heller and is invested in several mutual funds and in our Class A Common
Stock. Investments in our Class A Common Stock under this Plan are reported
as treasury stock and are included in the calculation of basic and diluted
earnings per share. At December 31, 1999, we held 189,859 shares of treasury
stock through the Plan. See Note 18 for additional information relating to
the Plan.
In addition, we held 177,815 shares of our Class A Common Stock for
use in meeting the requirements of our current stock incentive compensation
plans.
On October 18, 1999, we announced the authorization to repurchase up
to 2 million shares of our Class A Common Stock to provide stock for
issuance under our stock
option and restricted stock plans, as well as for other corporate purposes.
See footnote
23Subsequent Eventsfor information on our 2000 repurchases
under this program.
15. Fees and Other Income
The following table summarizes our fees and other income for the years
ended December 31, 1999, 1998 and 1997:
|
|
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Fee income and
other |
|
$117 |
|
$ 95 |
|
$ 88 |
Investment and asset sale
income |
|
169 |
|
111 |
|
118 |
|
|
|
|
|
|
|
Total |
|
$286 |
|
$206 |
|
$206 |
|
|
|
|
|
|
|
Fee income and other includes servicing income, late fees, prepayment
fees, early termination fees, residual rental income and other miscellaneous
fees.
Investment and asset sale income consists of gains on securitizations,
syndications and loan sales, net investment income and gains, equipment
residual gains and participation income.
Investment and asset sale income includes realized gains from
investment securities of $130 million, $92 million and $119 million during
the years ended December 31, 1999, 1998 and 1997, respectively and realized
losses and writedowns totaling $21 million, $33 million and $50 million for
1999, 1998 and 1997, respectively.
Securitization gains included in investment and asset sale income
totaled $13 million, $17 million and $26 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
16. Operating Expenses
The following table sets forth a summary of the major components of
operating expenses:
|
|
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Salaries and other
compensation |
|
$237 |
|
$227 |
|
$214 |
Legal and professional
fees |
|
45 |
|
31 |
|
26 |
Space costs |
|
37 |
|
30 |
|
30 |
Equipment costs |
|
25 |
|
24 |
|
17 |
Business acquisition
costs |
|
23 |
|
20 |
|
15 |
Travel and entertainment
costs |
|
19 |
|
16 |
|
15 |
Goodwill and noncompete
agreement amortization |
|
19 |
|
8 |
|
6 |
Other |
|
51 |
|
43 |
|
34 |
|
|
|
|
|
|
|
Total |
|
$456 |
|
$399 |
|
$357 |
|
|
|
|
|
|
|
Of the increase in operating expenses in 1999, $12 million related to
the HCFP consolidation which occurred in July 1999 and $48 million related
to the consolidation of the
Dealer Products Group for the full year 1999 versus $3 million for one month
of Dealer Products Group operations in 1998. These increases from our
acquisition activities were partially offset by a lower level of operating
expenses relating to our Commercial Services unit of which we divested in
November 1999.
Of the increase in operating expenses in 1998, $21 million related to
the consolidation of Factofrance for the full year 1998 versus nine months
in 1997.
17. Restructuring Charge
In 1998, we incurred a one time restructuring charge of $17 million.
This amount includes $8 million in severance benefits for termination of
approximately 15% of the Companys domestic employees. Also included
was $6 million related to office lease terminations and related leasehold
improvement writedowns. Restructuring charge liabilities were fully paid out
during 1999 and 1998.
18. Employee Benefits
We have various incentive compensation plans and a savings and
profit-sharing plan which provide for annual contributions for eligible
employees based on our achievement of certain financial objectives and
employee achievement of certain objectives.
Pension and Post Retirement PlansWe have a
noncontributory defined benefit pension plan (Retirement Plan)
covering substantially all of our domestic employees and a supplemental
retirement plan (SERP) in which certain employees participate. Our
policy is to fund, at a minimum, pension contributions as required by the
Employee Retirement Income Security Act of 1974. Benefits under the
Retirement Plan and SERP are based on an employees years of service
and average earnings for the five highest consecutive years of compensation
occurring during the last ten years before retirement.
We also provide health care benefits for eligible retired employees
and their eligible dependents through the Post-retirement Health Care Plan
(Health Care Plan).
The following table summarizes the change in the benefit obligations
for the Retirement Plan and Health Care Plan at the end of the respective
year and identifies the assumptions used to determine the benefit
obligation:
|
|
Retirement Plan
Year Ended
December 31,
|
|
Post-Retirement
Health Care Plan
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
|
|
(dollars in
millions) |
Change in benefit
obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January
1 |
|
$52 |
|
|
$47 |
|
|
$38 |
|
|
$ 10 |
|
|
$ 10 |
|
|
$ 7 |
|
Service
Cost |
|
4 |
|
|
4 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Interest
Cost |
|
4 |
|
|
3 |
|
|
3 |
|
|
1 |
|
|
1 |
|
|
1 |
|
Acquisitions/Divestitures |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss |
|
(7 |
) |
|
(1 |
) |
|
4 |
|
|
|
|
|
(1 |
) |
|
2 |
|
Benefits
paid |
|
(2 |
) |
|
(1 |
) |
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December
31 |
|
$50 |
|
|
$52 |
|
|
$47 |
|
|
$ 10 |
|
|
$ 10 |
|
|
$ 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January
1 |
|
$50 |
|
|
$42 |
|
|
$37 |
|
|
$ |
|
|
$ |
|
|
$ |
|
Actual
return on plan assets |
|
8 |
|
|
9 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Benefits
paid |
|
(2 |
) |
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December
31 |
|
$56 |
|
|
$50 |
|
|
$42 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
funded status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ 7 |
|
|
$ (2 |
) |
|
$ (5 |
) |
|
$ (10 |
) |
|
$ (10 |
) |
|
$ (10 |
) |
Unrecognized prior service
cost |
|
(1 |
) |
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Unrecognized actuarial (gain)
loss |
|
(15 |
) |
|
(3 |
) |
|
4 |
|
|
1 |
|
|
|
|
|
1 |
|
Unrecognized transition (asset)
obligation |
|
|
|
|
|
|
|
(1 |
) |
|
4 |
|
|
5 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount recognized in the statement of financial
position at December
31 |
|
$ (9 |
) |
|
$ (6 |
) |
|
$ (3 |
) |
|
$ (5 |
) |
|
$ (5 |
) |
|
$ (4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
7.50 |
% |
|
7.00 |
% |
|
7.25 |
% |
|
7.00 |
% |
|
7.00 |
% |
|
7.25 |
% |
Expected return on assets |
|
9.00 |
|
|
9.00 |
|
|
9.00 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Rate of salary increases |
|
5.00 |
|
|
5.00 |
|
|
6.00 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Components of net pension cost for the Retirement Plan and the Health
Care Plan for the following periods are:
|
|
Retirement Plan
Year Ended
December 31,
|
|
Post-Retirement
Healthcare Plan
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Service cost |
|
$ 4 |
|
|
$4 |
|
|
$3 |
|
|
$ |
|
$ |
|
$ |
Interest cost |
|
4 |
|
|
4 |
|
|
3 |
|
|
1 |
|
1 |
|
1 |
Expected return on plan
assets |
|
(5 |
) |
|
(4 |
) |
|
(3 |
) |
|
|
|
|
|
|
Prior service cost and
transition amount |
|
|
|
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ 3 |
|
|
$3 |
|
|
$2 |
|
|
$ 1 |
|
$ 1 |
|
$ 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The SERP has an unfunded benefit obligation of $3 million at December
31, 1999 and 1998, and $4 million at December 31, 1997. The SERP has an
unrecognized prior service cost of $2 million at December 31, 1999, 1998 and
1997. The unrecognized actuarial gain
was $4 million, $4 million and $2 million for the years ended December 31,
1999, 1998 and 1997, respectively. The ending accrued benefit cost
recognized was $5 million, $5 million and $4 million at December 31, 1999,
1998 and 1997, respectively. The net periodic pension cost for the SERP was
approximately $1 million for the years ended December 31, 1999, 1998 and
1997. The weighted average assumptions as of December 31, 1999, 1998 and
1997 for the SERP were equal to the discount rate and rate of salary
increases applied for the defined benefit plan.
In conjunction with the Dealer Products Group acquisition,
approximately 215 domestic employees of the Dealer Products Group became
eligible to participate in the Retirement Plan and the SERP as of December
1, 1998 and are subject to the Retirement Plan provisions regarding service
from that date. The eligible employees were granted vested service under the
Retirement Plan since their date of hire with the Dealer Products Group. The
additional employees did not have a significant impact on our pension
expense for 1998 or 1999.
In conjunction with the HCFP acquisition, approximately 123 employees
became eligible to participate in the Retirement Plan and the SERP as of
August 1, 1999. These employees are subject to the Retirement Plan
provisions regarding service from that date. The eligible employees were
granted vested service under the Retirement Plan since their date of hire
with HCFP. The additional employees did not have a significant impact on our
pension expense for 1999. We do not anticipate a significant impact on
pension expense for 2000 related to the new employees.
In conjunction with the sale of assets of our HCS unit that occurred
in December 1999, certain employees were no longer eligible to participate
in the Retirement Plan or SERP. The reduction of plan participants had no
impact on 1999 pension expense and will decrease 2000 pension expense by
approximately $1 million.
We adjust the discount and salary rates, as well as the expected rates
of return on assets, for the Retirement Plan and the SERP to reflect market
conditions at the measurement date. Changes in these assumptions will impact
the amount of pension expense in future years. The change in the discount
rate at December 31, 1999, combined with amortization of our actuarial gain,
will reduce pension expense by approximately $1 million in 2000. The change
in the discount rate and salary rate at December 31, 1998 did not have a
material impact on 1999 pension expense. We decreased the salary rate
assumption to 5% at December 31, 1998, based upon our expectation that a
greater portion of future salary increases will be provided in the form of
incentive compensation, which is not currently covered under Hellers
retirement plans.
We also adjust the discount, salary, and health care cost trend rates
for the Health Care Plan to reflect market conditions at the measurement
date. Changes in these assumptions will impact the amount of the benefit
expense in future years. The discount rate used at December 31, 1999 was
unchanged from the rate used at December 31, 1998. The change in the
discount rate at December 31, 1998 had an insignificant impact on 1999
expense.
The accumulated post retirement benefit obligation, under the terms of
the Health Care Plan, as amended, was calculated using relevant actuarial
assumptions and health care cost trend rates projected at annual rates
ranging from 7.5% in 1999 trending down to 5.0% in 2005 and thereafter. The
effect of a 1.0% annual increase in those assumed cost trend rates would
increase the accumulated post retirement benefit obligation by $1 million,
while annual service and interest cost components in the aggregate would not
be materially affected. The effect of a 1.0% annual decrease in these
assumed cost trend rates would
decrease the accumulated post retirement benefit obligation by $1 million,
while annual service and interest cost components in the aggregate would not
be materially affected.
Executive Deferred Compensation PlanOur Executive
Deferred Compensation Plan (the Plan) is a nonqualified deferred
compensation plan in which certain employees may elect to defer a portion of
their annual compensation on a pre-tax basis. The amount deferred remains an
asset of Heller and may be invested, at the participants discretion,
into certain mutual funds and our Class A Common Stock. Payment of amounts
deferred is made in a lump sum or in annual installments over a five, ten or
fifteen year period as determined by the participant.
Investments in our Class A Common Stock under this plan are reported
as treasury stock. At December 31, 1999, we held 189,859 shares of treasury
stock through the Plan. Plan assets, other than treasury stock, totaled $39
million and $24 million at December 31, 1999 and 1998.
We earned $5 million, $4 million and $5 million on plan assets during
1999, 1998 and 1997, respectively. Earnings on plan assets, other than
treasury stock, are included as part of fees and other income. Compensation
expense of these same amounts was also recorded in each of these
years.
Long Term Incentive PlansWe have long-term incentive
plans in which participants receive performance units that are granted at
the beginning of a three-year performance period. The value of a performance
unit is based on our three-year average return on equity target. The total
expense related to the long-term incentive plans was less than $1 million in
1999, $4 million in 1998 and $3 million in 1997. These plans will terminate
in 2000 after the payout for the 1997 to 1999 performance
period.
1998 Stock Incentive PlanWe adopted a stock-based
incentive plan, The Heller Financial, Inc. 1998 Stock Incentive Plan
(Stock Incentive Plan), covering non-employee directors and employees
(collectively, Participants).
The Stock Incentive Plan provides for the grant of incentive and
non-qualified stock options, restricted stock, stock appreciation rights,
performance shares and performance units (Awards). The terms
of the Awards are set forth in award agreements (Award Agreements).
The Compensation Committee of the Heller Board of Directors, in its sole
discretion, determines which employees receive Awards as well as the type,
size and terms and conditions applicable to any Award. The Compensation
Committee also has the authority to interpret, construe and implement the
provisions of the Stock Incentive Plan. Awards to non-employee directors
will be made by members of our Board of Directors who are not otherwise
entitled to participate in the Stock Incentive Plan, or will be based on a
formula developed by the Board of Directors or the Compensation
Committee.
Under the Stock Incentive Plan, 2,864,757 shares of Class A Common
Stock are available for Awards as of December 31, 1999. During 1999, we
awarded shares of restricted stock and non-qualified options to purchase
shares of Class A Common Stock as discussed below:
Restricted StockIn conjunction with our Offering, we
issued 509,019 shares of restricted Class A Common Stock during 1998 and, as
part of compensation awards, granted an additional 197,604 shares during
1999. As of December 31, 1999, there were 657,611 restricted shares
outstanding.
All restricted shares granted during 1998 and 1999 were issued at
the fair market value on the date of grant. Shares issued in conjunction
with our Offering vest on January 1, 2001, if we achieve certain net income
growth targets as specified in the Restricted Stock Award Agreements. If we
do not achieve these growth targets by January 1, 2001, these restricted
stock awards will vest on January 1, 2004. Shares awarded during 1999 have
various vesting periods, none of which exceed a three-year
period.
The holder of restricted stock generally has the rights of a Heller
stockholder, including the right to vote and to receive cash dividends prior
to the end of the vesting period. Compensation expense related to these
shares totaled $5 million and $5 million during 1999 and 1998,
respectively.
Stock Options Each option represents the right to
purchase one share of our Class A Common Stock. No compensation expense was
recorded, as the exercise price of each option granted equals the market
price of our Class A Common Stock on the grant date. The options expire ten
years from the grant date.
Of the options granted in 1999, as presented in the table below,
approximately 1.1 million related to the HCFP acquisition and were 100%
vested on the grant date. The options were issued at prices ranging from $2
to $37 per share to replace stock options previously held by HCFP employees
for HCFP common stock. The remaining options granted in 1999 will vest
ratably over a four year period from the date of grant. The options granted
in 1998 vest on January 1, 2001.
A summary of the status and activity of stock options under the Stock
Incentive Plan as of December 31, 1999 and 1998, and changes during the
years ending on those dates is presented below:
|
|
1999
|
|
1998
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at beginning
of year |
|
1,291,952 |
|
|
$26.85 |
|
|
|
|
|
Granted |
|
2,293,824 |
|
|
25.29 |
|
1,322,202 |
|
|
$26.85 |
Exercised |
|
(136,863 |
) |
|
11.81 |
|
|
|
|
|
Forfeited |
|
(298,118 |
) |
|
27.84 |
|
(30,250 |
) |
|
27.00 |
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of
year |
|
3,150,795 |
|
|
26.27 |
|
1,291,952 |
|
|
26.85 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair
value of options
granted during the year |
|
$13.45 |
|
|
|
|
$9.29 |
|
|
|
The following table summarized information about fixed stock options
outstanding at December 31, 1999:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range of Exercise
Prices
|
|
Number
Outstanding
at 12/31/99
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
Exercisable
at 12/31/99
|
|
Weighted-
Average
Exercise
Price
|
$2 to $11 |
|
155,325 |
|
9.6 years |
|
$7.75 |
|
155,325 |
|
$7.75 |
21 to
27 |
|
1,821,318 |
|
9.5 years |
|
25.86 |
|
640,004 |
|
24.35 |
28 to
37 |
|
1,174,152 |
|
9.4 years |
|
29.37 |
|
93,097 |
|
36.56 |
|
|
|
|
|
|
|
|
|
|
|
$2 to $37 |
|
3,150,795 |
|
|
|
|
|
888,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting for Stock-Based Compensation PlansWe account
for the stock options in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25).
Under APB No. 25, we do not recognize compensation expense on the issuance
of our stock options as the option terms are fixed and the exercise price
equals the market price of the underlying stock on the grant date. If we
were to implement Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation, our net income applicable to
common stock for 1999 and 1998 would have been $243 million and $170
million, respectively. Our pro-forma diluted earnings per share would have
been $2.61 and $1.89 for 1999 and 1998, respectively. The weighted average
fair value of each option granted during 1999 and 1998 was $13.45 and $9.29,
respectively. The annual cost of the stock options was determined using a
Black-Scholes option-pricing model that assumed the following:
|
|
a ten-year option life for
1999 and 1998;
|
|
|
a risk-free interest rate
of 4.76% for 1999 and 5.67% for 1998;
|
|
|
a dividend yield of 1.26%
for 1999 and 1.60% for 1998; and
|
|
|
volatility of 36.51% for
1999 and 19.44% for 1998 based on industry peers
volatility.
|
Employee Stock Purchase PlanWe adopted an Employee Stock
Purchase Plan (the ESPP) which offers employees the opportunity to
purchase Class A Common Stock at a discount through payroll deductions. The
ESPP meets the requirements of Section 423 of the Internal Revenue Code. All
regular full-time and part-time employees are eligible to participate in the
ESPP after six months of employment. Employees desiring to purchase stock
through ESPP may elect to reduce their pay by up to 10% in any payroll
period. These payroll deductions accumulate during a three-month purchase
period. At the end of each purchase period, the payroll deductions are
used to purchase Class A Common Stock at a price equal to 85% of the fair
market value of the Class A Common Stock on the last day of the respective
purchase period. We purchase shares of Class A Common Stock in the open
market to satisfy purchases under the ESPP. During 1999 and 1998, we
incurred expenses related to the ESPP of $408,000 and $142,000.
19. Income Taxes
The provision for income taxes is summarized in the following
table:
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ 89 |
|
|
$ 35 |
|
|
$107 |
|
Utilization of investment and foreign
tax credits |
|
(8 |
) |
|
(4 |
) |
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
Net federal |
|
81 |
|
|
31 |
|
|
61 |
|
State |
|
11 |
|
|
5 |
|
|
5 |
|
Foreign |
|
22 |
|
|
24 |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
114 |
|
|
60 |
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
37 |
|
|
32 |
|
|
(17 |
) |
State |
|
3 |
|
|
1 |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
40 |
|
|
33 |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$154 |
|
|
$ 93 |
|
|
$ 66 |
|
|
|
|
|
|
|
|
|
|
|
Of the total current income tax provision recorded in 1999, $31
million relates to the gain on sale of the Commercial Services
assets.
We filed a consolidated United States federal income tax return with
FAHI through the date of the Offering in May 1998 (and with HIC in 1997).
Since then, we file our own United States federal income tax return.
International Group filed a separate United States federal income tax return
through the date of the Offering. Subsequent to that date, International
Group is included in our consolidated United States federal income tax
return.
We record future tax benefits for deductible temporary differences if
we believe that we will realize these benefits. In the period we filed a
consolidated income tax return with FAHI or HIC, we recorded income tax
expense as if we were a separate taxpayer. Included in income tax expense
are amounts relating to International Group.
We made United States federal income tax payments of $67 million in
1999 and $20 million since the Offering through December 1998. United States
federal income taxes paid by International Group amounted to $3 million in
1997.
Under the terms of the tax allocation agreements between Heller and
FAHI through April 1998, we calculated our current and deferred income taxes
based on our taxable income or loss, utilizing separate company net
operating losses, tax credits, capital losses and deferred tax assets or
liabilities. In accordance with the provisions of the tax allocation
agreements, net payments of $6 million were made to FAHI through April 1998
and payments of $73 million were made to HIC in 1997,
respectively.
The reconciliation between the statutory federal income tax provision
and the actual effective tax provision for each of the three years ended
December 31 is as follows:
|
|
1999
|
|
1998
|
|
1997
|
|
|
(in
millions) |
Tax provision at statutory
rate |
|
$154 |
|
|
$101 |
|
|
$82 |
|
State and foreign income
taxes, net of federal income tax effects |
|
32 |
|
|
31 |
|
|
23 |
|
Income of foreign
subsidiaries and joint ventures and foreign tax
credit utilization |
|
(29 |
) |
|
(37 |
) |
|
(32 |
) |
Resolution of tax
issues |
|
|
|
|
(3 |
) |
|
(2 |
) |
Other, net |
|
(3 |
) |
|
1 |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$154 |
|
|
$ 93 |
|
|
$66 |
|
|
|
|
|
|
|
|
|
|
|
The significant components of the deferred tax assets and deferred
tax liabilities at December 31, 1999 and 1998 are shown below:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
(in
millions) |
Deferred Tax
Assets: |
|
|
|
|
|
|
Allowance for loan losses |
|
$128 |
|
|
$112 |
|
Foreign tax credits |
|
5 |
|
|
5 |
|
Lease portfolio
acquisitions |
|
36 |
|
|
58 |
|
Net operating losses |
|
54 |
|
|
48 |
|
Equity interests and other
investments |
|
20 |
|
|
25 |
|
Terminated swap income |
|
|
|
|
1 |
|
Accrued expenses |
|
36 |
|
|
29 |
|
|
|
|
|
|
|
|
Gross deferred tax
assets |
|
279 |
|
|
278 |
|
Valuation
allowance |
|
(5 |
) |
|
(5 |
) |
|
|
|
|
|
|
|
Gross deferred tax assets,
net of valuation allowance |
|
274 |
|
|
273 |
|
Deferred Tax
Liabilities: |
|
|
|
|
|
|
Repossessed properties |
|
$ (8 |
) |
|
$ (3 |
) |
Fixed assets and deferred income from
lease financing |
|
(67 |
) |
|
(28 |
) |
Unrealized appreciation of securities
available for sale |
|
(5 |
) |
|
(13 |
) |
|
|
|
|
|
|
|
Gross deferred tax
liabilities |
|
(80 |
) |
|
(44 |
) |
|
|
|
|
|
|
|
Net deferred tax
asset |
|
$194 |
|
|
$229 |
|
|
|
|
|
|
|
|
We have not made a provision for United States or additional foreign
taxes on $188 million of undistributed earnings of subsidiaries outside the
United States since we intend to reinvest those earnings. These earnings
would become taxable upon the sale or liquidation of these international
operations or upon the remittance of dividends. Given the availability of
foreign tax credits and various tax planning strategies, we believe any tax
liability which may ultimately be paid on these earnings would be
substantially less than that computed at the statutory federal income tax
rate. Upon remittance, certain foreign countries impose withholding taxes
that are then available, subject to certain limitations, for use as credits
against our United States tax liability. The amount of withholding tax that
would be payable upon remittance of the entire amount of undistributed
earnings is approximately $16 million.
We had unused foreign tax credit carryforwards of $5 million at
December 31, 1999 and 1998. Due to substantial restrictions on the
utilization of foreign tax credits imposed by the Tax Reform Act of 1986, we
may not be able to utilize a significant portion of foreign tax credit
carryforwards prior to expiration. Accordingly, we have recognized a
valuation allowance for the amount of foreign tax credits recorded at
December 31, 1999 and 1998.
We have recorded a net deferred tax asset of $194 million as of
December 31, 1999. Although realization is not assured, we believe it is
more likely than not that the deferred tax assets will be realized. The
amount of the deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income are reduced.
20. Basic and Diluted Net Income Per Share and Pro Forma Net
Income Per Share
The following table shows the calculation of net income applicable to
common stock per share on a basic and diluted basis for the periods
indicated:
|
|
Quarter Ended December
31,
|
|
Twelve Months Ended
December 31,
|
|
|
(unaudited) |
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Net Income applicable to
common stock
(in millions) |
|
$ 103 |
|
$ 41 |
|
$ 103 |
|
$ 41 |
|
$ 256 |
|
$ 172 |
|
$ 256 |
|
$ 172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equivalent shares
of common
stock outstanding (in thousands) |
|
97,325 |
|
90,081 |
|
97,325 |
|
90,081 |
|
93,158 |
|
77,050 |
|
93,158 |
|
77,200 |
Stock options |
|
|
|
|
|
121 |
|
4 |
|
|
|
|
|
75 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average equivalent
shares |
|
97,325 |
|
90,081 |
|
97,446 |
|
90,085 |
|
93,158 |
|
77,050 |
|
93,233 |
|
77,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share |
|
$ 1.06 |
|
$ 0.46 |
|
$ 1.06 |
|
$ 0.46 |
|
$ 2.75 |
|
$ 2.23 |
|
$ 2.74 |
|
$ 2.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents the pro forma net income applicable to common
stock per share on a basic and diluted basis. Pro forma information adjusts
for the impact of our Offering of Class A Common Stock that occurred in May
1998 and assumes that shares issued in conjunction with the Offering have
been outstanding since the beginning of 1998. We compute pro forma basic net
income applicable to common stock per share based on net income applicable
to common stock divided by the average number of shares outstanding during
the period. We compute pro forma diluted net income applicable to common
stock per share based on net income applicable to common stock divided by
the average number of shares outstanding during the period plus the dilutive
effect of stock options.
|
|
Quarter Ended December
31,
|
|
Twelve Months Ended
December 31,
|
|
|
(unaudited) |
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Net income applicable to
common stock
(in millions) |
|
$ 103 |
|
$ 41 |
|
$ 103 |
|
$ 41 |
|
$ 256 |
|
$ 172 |
|
$ 256 |
|
$ 172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock
outstanding |
|
97,325 |
|
90,081 |
|
97,325 |
|
90,081 |
|
93,158 |
|
89,797 |
|
93,158 |
|
90,073 |
Stock options |
|
|
|
|
|
121 |
|
4 |
|
|
|
|
|
75 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pro forma shares |
|
97,325 |
|
90,081 |
|
97,446 |
|
90,085 |
|
93,158 |
|
89,797 |
|
93,233 |
|
90,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per
share |
|
$ 1.06 |
|
$ 0.46 |
|
$ 1.06 |
|
$ 0.46 |
|
$ 2.75 |
|
$ 1.92 |
|
$ 2.74 |
|
$ 1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents the pro forma net income applicable to
common stock per share on a basic and diluted basis excluding the after-tax
gain from the sale of the Commercial Services assets:
|
|
Quarter Ended December
31,
|
|
Twelve Months Ended
December 31,
|
|
|
(unaudited) |
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Net income applicable to
common
stock, net of HCS gain |
|
$ 55 |
|
$ 41 |
|
$ 55 |
|
$ 41 |
|
$ 208 |
|
$ 172 |
|
$ 208 |
|
$ 172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
97,325 |
|
90,081 |
|
97,325 |
|
90,081 |
|
93,158 |
|
89,797 |
|
93,158 |
|
90,073 |
Stock options |
|
|
|
|
|
121 |
|
4 |
|
|
|
|
|
75 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pro forma shares |
|
97,325 |
|
90,081 |
|
97,446 |
|
90,085 |
|
93,158 |
|
89,797 |
|
93,233 |
|
90,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per
share, net
of HCS gain |
|
$ 0.56 |
|
$ 0.46 |
|
$ 0.56 |
|
$ 0.46 |
|
$ 2.23 |
|
$ 1.92 |
|
$ 2.23 |
|
$ 1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21. Related Parties
We have several financial, administrative or other service
arrangements with Fuji Bank, FAHI or related affiliates. We believe that the
terms of these arrangements were similar to those we would have obtained in
like agreements with unaffiliated entities in arms-length
transactions.
Keep Well Agreement with Fuji Bank. The Keep Well Agreement
provides that if Heller should lack sufficient cash or credit facilities to
meet our commercial paper obligations, Fuji Bank will lend us up to $500
million. That loan would be payable on demand. We could only use the
proceeds from the loan to meet our commercial paper obligations.
The Keep Well Agreement further provides that Fuji Bank will maintain
our stockholders equity at $500 million. Accordingly, if at the close
of any month our stockholders equity is less than $500 million Fuji
Bank will purchase, or cause one of its subsidiaries to purchase, shares of
our NW Preferred Stock in an amount necessary to increase our stockholders
equity to $500 million.
We paid commitment fees to Fuji Bank under the Keep Well Agreement of
less than $1 million in 1999, 1998 and 1997. Interest on any loans will be
charged at the prime rate of Morgan Guaranty Trust Company of New York plus
.25% per annum. No loans or purchases of NW Preferred Stock have been made
by Fuji Bank under this agreement.
Neither Fuji Bank nor us can terminate the Keep Well Agreement prior
to December 31, 2002. After December 31, 2002, the Keep Well Agreement can
only be terminated if we have received written certifications from Moody
s Investor Service, Inc. and Standard and Poors Corporation
that, upon termination, our Series A Preferred Stock will be rated no lower
than a3 and A, respectively and our Series C
Preferred Stock will be rated no lower than baa1 and BBB
, respectively. Similarly, after December 31, 2002, the agreement may
only be terminated if our senior debt ratings were unchanged as a result of
the termination of the Agreement. After December 31, 2007, the agreement may
be terminated by either party with 30 business days written
notice.
We amended the Keep Well Agreement in connection with the Offering to
allow us or Fuji Bank or any of its affiliates to sell or dispose of Common
Stock to any person or entity
on the condition that Fuji Bank (directly or indirectly through one or more
subsidiaries) continues to hold greater than 50% of the combined voting
power of the outstanding Common Stock.
Purchase of Interest in International Group from Fuji Bank. In
connection with the Offering, we purchased Fuji Banks interest in
International Group for total cash consideration of approximately $83
million. The cost included $54 million for the International Group common
stock owned by Fuji Bank, valued at book value, and $29 million for the
International Group preferred stock owned by Fuji Bank, valued at a modest
premium over book value.
Services Provided by Fuji Bank and HIC for Heller. Certain
employees of Fuji Bank performed managerial, administrative and other
related functions for Heller during 1999, 1998 and 1997. Certain employees
of HIC also performed managerial, administrative, and other related
functions for us during 1997. In conjunction with the ownership transfer of
Heller from HIC to FAHI in January 1998, the majority of HICs
employees were transferred to Heller. We compensated Fuji Bank for the use
of such individuals services at a rate that reflects current costs.
The amount paid to Fuji Bank for these services was approximately $1 million
in 1999 and 1998. The amounts paid to Fuji Bank and HIC for these services
were $2 million and $77 million, respectively, in 1997. Additionally,
certain subsidiaries of Fuji Bank act as registrar and paying agent for
certain debt issuances by Heller. These services are provided at market
rates.
Services Provided by Heller for Fuji Bank and Affiliates. We
perform services for our affiliates, including FAHI, and charge them for the
cost of the work performed. The amount received from FAHI was less than $1
million in 1999 and 1998. Additionally, we guaranteed payment under a
deferred compensation arrangement between FAHI and certain of its employees
who were providing services to Heller. We may also guarantee the obligations
of our clients or the clients of certain joint ventures, under letters of
credit issued by financial institutions, some of which are Hellers
affiliates.
Intercompany Receivables, Payables, Transactions and Financial
Instruments. At December 31, 1999 and 1998, other payables and other
receivables, respectively, included net amounts due to and due from
affiliates of $3 million. These amounts mainly include interest bearing
demand notes representing amounts due to or from Heller arising from an
interest rate swap agreement with FAHI, advances, administrative fees and
costs charged to other subsidiaries of FAHI and amounts payable to FAHI for
services provided. The notes bear interest at rates that approximate the
average rates our commercial paper obligations or short-term bank borrowing
rates outstanding during the period. During 1999 and 1998, we paid interest
of $160,000 and $1.7 million, respectively, to FAHI related to these
notes.
Fuji Banks trust department may purchase our commercial paper
for its clients. We paid interest expense related to these borrowings of
$272,000 in 1998.
Fuji Bank and one of its subsidiaries provided uncommitted lines of
credit to our consolidated international subsidiaries totaling $25 million
and $27 million at December 31, 1999 and 1998, respectively. Borrowings
under these facilities totaled $2 million at December 31, 1998. In addition,
Fuji Bank provides committed and uncommitted lines of credit to certain
international joint ventures.
During 1999, we had an accounts receivable sale facility which allowed
us to sell an undivided interest of up to $503 million in a designated pool
of our factored accounts receivable to five bank-sponsored conduits. The
underlying liquidity support for the conduits
was provided by unaffiliated entities. One of the conduits had an operating
agreement with Fuji Bank. We paid fees of $247,000 and interest expense of
$2 million to Fuji Bank during 1999 for services provided under this
agreement. This agreement was terminated when we sold the assets of our
Commercial Services business unit during the fourth quarter of
1999.
During 1999, Global Vendor Finance purchased a leasing portfolio from
FUJI Leasing (Deutschland) GMBH for approximately $4 million.
22. Fair Value Disclosures
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of fair
value information for certain financial instruments, for which it is
practicable to estimate that value. Since there is no well-established
market for many of our assets and financial instruments, fair values are
estimated using present value, property yield, historical rate of return and
other valuation techniques. These techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. These assumptions are inherently judgmental and changes in such
assumptions could significantly affect fair value calculations. The derived
fair value estimates may not be substantiated by comparison to independent
markets and may not be realized in immediate liquidation of the
instrument.
Our carrying values and estimated fair values of our financial
instruments at December 31, 1999 and 1998, are as follows:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
Carrying
Value
|
|
Estimated
Fair
Value
|
|
Carrying
Value
|
|
Estimated
Fair
Value
|
|
|
(in
millions) |
Total
receivables |
|
$14,795 |
|
$14,945 |
|
|
$11,854 |
|
$11,887 |
|
Total
investments |
|
1,794 |
|
1,901 |
|
|
1,338 |
|
1,391 |
|
Debt |
|
13,832 |
|
14,094 |
|
|
10,449 |
|
10,456 |
|
Swap
agreements: |
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
79 |
|
|
|
|
10 |
|
Liability |
|
|
|
(49 |
) |
|
|
|
(66 |
) |
Forward currency exchange
contracts |
|
6 |
|
6 |
|
|
2 |
|
2 |
|
Interest rate futures
contracts |
|
32 |
|
32 |
|
|
|
|
|
|
We used the following methods and assumptions to estimate the fair
value disclosures for financial instruments. Carrying values approximate
fair values for all financial instruments which are not specifically
addressed.
For variable rate receivables that re-price frequently and are
performing at acceptable levels, fair values were assumed to equal carrying
values. All other receivables were pooled by loan type and risk rating. We
estimated the fair value for these receivables by employing discounted cash
flow analyses using interest rates equal to the London Inter-Bank Offered
Rate or the Prime rate offered as of December 31, 1999 and 1998 plus an
adjustment for normal spread, credit quality and the remaining terms of the
loans.
Carrying and fair values of the securities available for sale are
based predominantly on quoted market prices. We use our business valuation
model to determine the estimated value of our equity and other investments
as of their anticipated exercise date. The business valuation model analyzes
the cash flows of the related company and considers values for similar
equity investments. The determined value is then discounted back to December
31, 1999 and 1998 using an appropriate rate of return for equity
investments.
We estimated the fair value of our notes and debentures using
discounted cash flow analyses. These analyses are based on current
incremental borrowing rates for arrangements with similar terms and
remaining maturities as quoted by independent financial institutions as of
December 31, 1999 and 1998. Fair values were assumed to equal carrying
values for commercial paper and other short-term borrowings.
The estimated fair value of interest rate swap agreements represents
the mark to market loss and mark to market gain outstanding as of December
31, 1999 and 1998, respectively, as based upon quoted market prices obtained
from independent financial institutions. Forward and futures contracts are
carried at fair value. The fair values of loan commitments, letters of
credit and guarantees are negligible.
23. Operating Segments
We adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information,
in 1998. This statement requires us to report segment information based upon
the way we organize segments within the Company for making operating
decisions and assessing performance.
Our two reportable segments, Domestic Commercial Finance and
International Factoring and Asset Based Finance, are identified based upon
our strategic business units whose long-term financial performance is
affected by similar economic conditions. Each segment is managed separately
by its own President.
Domestic Commercial FinanceThis segment consists of five
business units:
|
(i)
|
Heller Corporate Finance
(Corporate Finance): providing collateralized cash flow and asset
based lending;
|
|
(ii)
|
Heller Real Estate
Financial Services (Real Estate Finance): providing secured real
estate financing;
|
|
(iii)
|
Heller Leasing Services
(Leasing Services): providing debt and lease financing of small and
large ticket equipment and commercial aircraft;
|
|
(iv)
|
Heller Small Business
Finance (Small Business Finance): providing financing to small
businesses, primarily under U.S. Small Business Administration (SBA)
loan programs; and
|
|
(v)
|
Heller Healthcare Finance
(Healthcare Finance): providing financing for the healthcare
industry.
|
Prior to December 31, 1999, we also had Heller Commercial Services
(Commercial Services) which provided factoring and receivables
management services. This business unit was sold during the fourth quarter
of 1999. See Note 5Commercial Services Salefor more
details.
Domestic Commercial Finance also includes receivables for domestic
business activities that we are no longer pursuing.
International Factoring and Asset Based FinanceThis
segment, managed by International Group, provides various types of financing
through five majority owned subsidiaries and 10 joint ventures. These
subsidiaries and joint ventures operate in 20 countries in Europe,
Asia/Pacific and Latin America. The types of financing provided
include:
|
|
factoring and receivables
management services;
|
|
|
leasing and vendor finance
and/or trade finance programs.
|
We evaluate the performance of our operating segments based on net
income. Inter-segment sales and transfers are not significant. The
reportable segments accounting policies are consistent with ours, as
described in Note 1, Summary of Significant Accounting
Policies.
Summarized financial information concerning our reportable segments is
shown in the following table.
|
|
Domestic
Commercial
Finance
|
|
International
Factoring
and
Asset Based
Finance
|
|
Consolidated
Company
|
|
|
(in
millions) |
Total assets: |
1999 |
|
$14,510 |
|
$3,463 |
|
$17,973 |
1998 |
|
11,278 |
|
3,088 |
|
14,366 |
1997 |
|
10,278 |
|
2,583 |
|
12,861 |
Revenues: |
1999 |
|
1,372 |
|
265 |
|
1,637 |
1998 |
|
1,163 |
|
244 |
|
1,407 |
1997 |
|
1,083 |
|
187 |
|
1,270 |
Income of international
joint ventures: |
1999 |
|
1 |
|
34 |
|
35 |
1998 |
|
|
|
30 |
|
30 |
1997 |
|
|
|
36 |
|
36 |
Net interest
income: |
1999 |
|
474 |
|
38 |
|
512 |
1998 |
|
381 |
|
42 |
|
423 |
1997 |
|
382 |
|
26 |
|
408 |
Net Income: |
1999 |
|
236 |
|
48 |
|
284 |
1998 |
|
163 |
|
30 |
|
193 |
1997 |
|
145 |
|
13 |
|
158 |
Net income of Domestic Commercial Finance for 1999 includes a one-time
after-tax gain of $48 million relating to the sale of assets of our
Commercial Services unit. See Note 5Commercial Services Sale
for more details.
Net income of Domestic Commercial Finance for 1998 was reduced by a
one-time charge of $17 million ($12 million net of tax) relating to our
restructuring initiative. International Factoring and Asset Based Finance
net income was reduced by minority interest of $1 million, $4 million and $9
million in 1999, 1998 and 1997, respectively.
We have allocated expenses of our corporate support functions to
Domestic Commercial Finance and International Factoring and Asset Based
Finance based on estimates of services provided to these segments.
Unallocated expenses have been included with the Domestic Commercial Finance
segment.
The following table presents certain financial information by
geographic region for the years ended December 31, 1999, 1998 and 1997. We
have attributed revenues to the specific region of transaction
origination.
|
|
United
States
|
|
For the Year Ended
December 31,
|
|
Latin
America
|
|
Consolidated
|
|
|
|
Canada
|
|
France
|
|
Other
Europe
|
|
Asia/
Pacific
|
|
|
(in
millions) |
Long-lived
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
$ 953 |
|
$ |
|
$ 87 |
|
$186 |
|
$18 |
|
$27 |
|
$1,271 |
1998 |
|
502 |
|
|
|
102 |
|
237 |
|
17 |
|
39 |
|
897 |
1997 |
|
225 |
|
|
|
94 |
|
146 |
|
17 |
|
44 |
|
526 |
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
$1,332 |
|
$ 6 |
|
$187 |
|
$ 70 |
|
$19 |
|
$23 |
|
$1,637 |
1998 |
|
1,159 |
|
|
|
188 |
|
31 |
|
21 |
|
8 |
|
1,407 |
1997 |
|
1,083 |
|
|
|
127 |
|
26 |
|
26 |
|
8 |
|
1,270 |
24. Summary of Quarterly Financial Information
(Unaudited)
The following financial information for the calendar quarters of 1999,
1998 and 1997, is unaudited. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods have
been included.
|
|
Quarter
Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(in
millions) |
Net interest
income |
|
|
|
|
|
|
|
|
1999 |
|
$113 |
|
$118 |
|
$133 |
|
$148 |
1998 |
|
99 |
|
105 |
|
109 |
|
110 |
1997 |
|
92 |
|
107 |
|
104 |
|
105 |
Operating
revenues |
|
|
|
|
|
|
|
|
1999 |
|
$223 |
|
$225 |
|
$239 |
|
$265 |
1998 |
|
186 |
|
194 |
|
196 |
|
207 |
1997 |
|
141 |
|
199 |
|
193 |
|
221 |
Provision for
losses |
|
|
|
|
|
|
|
|
1999 |
|
$ 29 |
|
$ 30 |
|
$ 37 |
|
$ 41 |
1998 |
|
15 |
|
17 |
|
27 |
|
18 |
1997 |
|
22 |
|
34 |
|
48 |
|
60 |
Net income |
|
|
|
|
|
|
|
|
1999 |
|
$ 57 |
|
$ 58 |
|
$ 59 |
|
$110 |
1998 |
|
48 |
|
51 |
|
47 |
|
47 |
1997 |
|
39 |
|
44 |
|
40 |
|
35 |
Net income for the fourth quarter of 1999 includes a one-time
after-tax gain of $48 million relating to the sale of assets of our
Commercial Services unit. See Note 5Commercial Services Sale
for more details.
25. Accounting Developments
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
Accounting for Derivative Instruments and Hedging Activities, as
amended by Statement of Financial Accounting Standards No. 137, Deferral
of the Effective Date of FASB Statement No. 133 (collectively referred
to as SFAS No. 133). This Statement establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments embedded in other contracts)
to be recorded in the balance sheet as either an asset or liability measured
at its fair value. Changes in the fair value of the derivative are to be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows gains and losses on
derivatives to offset related results on the hedged items in the income
statement and requires that a company must document, designate, and assess
the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. We are
assessing the impact of this statement and will adopt it on January 1,
2001.
26. Subsequent Events
In January 2000, we granted to various employees approximately 1.1
million options to purchase shares of Hellers Class A Common Stock. No
compensation expense was recorded in conjunction with the awards as the
exercise price equaled the market value of the stock on the date of grant.
The options vest equally over each of the next 4 years.
In February 2000, we granted approximately 109,000 shares of
restricted Class A Common Stock to employees of Heller. Compensation expense
will be recorded ratably over the vesting periods which range from two to
five years.
In January 2000, we sold our interest in our Belgium operating
companies, Kefam N.V., Belgo-Factors and International
Automatiserings-Centrum, N.V. Our investment in these entities totaled
nearly $12 million at the time of sale. The gain resulting from this
transaction will be recorded in the first quarter of 2000.
On February 15, 2000, we paid dividends of $0.10 per share on our
Class A and Class B Common Stock.
In February 2000, we securitized approximately $375 million in CMBS
assets that were receivables of Heller at December 31, 1999.
As of February 2000, we have repurchased 1 million shares of our Class
A Common Stock to provide stock for issuance under our stock option and
restricted stock plans, as well as for other corporate purposes.
In February 2000, we filed a registration statement with the SEC in
order to exchange $600 million of 7.375% notes due November 1, 2009 with
substantially identical notes previously issued in a privately placed
transaction under SEC Rule 144 A and Regulation S.
All of the above items were completed by February 15,
2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information required by this item pertaining to executive officers
of the Company is set forth below. The information required by this item
pertaining to directors of the Company and to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference to the
Companys Proxy Statement for the 2000 Annual Meeting of Stockholders.
Directors of Heller may also be directors of certain of its wholly-owned
subsidiaries.
Executive Officers
Richard J. Almeida
|
Mr. Almeida, age 57,
has served as Chairman of the Board and Chief Executive Officer of Heller
and Heller International Group, Inc. (International Group), a
wholly-owned subsidiary through which Heller conducts its international
business, since November 1995, and as a Director of Heller since November
1987. He has been Director of Fuji America Holdings, Inc. (FAHI), a
subsidiary of The Fuji Bank, Limited, and the majority stockholder of
Heller, since January 1998. He previously held the positions of Executive
Vice President and Chief Financial Officer from November 1987 to November
1995. Mr. Almeida also serves as a Director of The Fuji Bank and Trust
Company, a subsidiary of Fuji Bank. Prior to joining Heller in 1987, Mr.
Almeida held a number of operating positions, both in corporate banking
and investment banking, for Citicorp.
|
Nina B. Eidell
|
Ms. Eidell, age 47,
has served as Executive Vice President and Chief Human Resources Officer
of Heller since March 1998. From February 1995 to February 1998, she
served as Director, Human Resources of the American Bar Association. Ms.
Eidell previously spent eight years with Citicorp, where she held a
variety of human resources management roles. She has also held human
resources leadership positions with Sara Lee Corporation and R.R.
Donnelley & Sons Company.
|
Michael J. Litwin
|
Mr. Litwin, age 52,
has served as Executive Vice President and Chief Credit Officer of Heller
since January 1997, and in 1999 became Chief Risk Officer of Heller. He
previously served as a Director of Heller from April 1990 to July 1998,
and Senior Group President of Heller from October 1990 to January 1997.
Mr. Litwin has served in various other positions since joining Heller in
1971, including Assistant General Counsel.
|
Dennis P. Lockhart
|
Mr. Lockhart, age 53,
has been a Director of Heller and President of International Group since
January 1988. In his current position, Mr. Lockhart has principal
responsibility for our international operations. Mr. Lockhart also serves
as a Director of Tri Valley Corporation. Prior to joining Heller in 1988,
Mr. Lockhart was employed by Citicorp for 16 years, holding a number of
positions in corporate/institutional banking domestically and abroad,
including assignments in Lebanon, Saudi Arabia, Greece, Iran, New York and
Atlanta, with regional
experience encompassing Europe, the Middle East, Africa and Latin
America.
|
Lauralee E. Martin
|
Ms. Martin, age 49,
has served as Executive Vice President and Chief Financial Officer of
Heller since May 1996. She was a Director of Heller from May 1991 to July
1998, and Senior Group President of Heller from October 1990 to May 1996.
Ms. Martin has been a Director of Gables Residential Trust since January
1994. Prior to joining Heller in 1986, Ms. Martin held a variety of senior
management positions with General Electric Credit Corporation.
|
Debra H. Snider
|
Ms. Snider, age 45,
has served as Chief Administrative Officer of Heller since February 1997,
General Counsel since October 1995, Executive Vice President and Secretary
since April 1995, and Secretary of FAHI since January 1998. She previously
served as Acting General Counsel of Heller from April 1995 to October
1995. Prior to joining Heller, Ms. Snider was a Partner at the law firm of
Katten Muchin & Zavis from February 1991 to March 1995, and First Vice
President and Associate General Counsel at the Balcor Company.
|
Frederick E. Wolfert
|
Mr. Wolfert, age 45,
has served as a Director of Heller since July 1998 and as President and
Chief Operating Officer since January 1998. In this capacity, he has
principal responsibility for all of our domestic businesses. Prior to
joining Heller, Mr. Wolfert was Chairman of Key Global Finance Ltd. from
April 1996 to December 1997, Chairman, President and Chief Executive
Officer of KeyCorp Leasing, Ltd. from June 1993 to December 1997,
Chairman, President and Chief Executive Officer of KeyBank USA N.A. from
June 1993 to December 1996, President and Chief Operating Officer of
KeyCorp Leasing, Ltd. from December 1991 to June 1993, and Executive Vice
President of KeyBank USA N.A. from December 1991 to June 1993. Prior to
1991, Mr. Wolfert held various management positions with U.S. Leasing
Corporation.
|
ITEM 11. EXECUTIVE COMPENSATION
|
The information required
by this Item is incorporated by reference to the Companys Proxy
Statement for the 2000 Annual Meeting of Stockholders.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
|
The information required
by this Item is incorporated by reference to the Companys Proxy
Statement for the 2000 Annual Meeting of Stockholders.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
|
The information required
by this Item is incorporated by reference to the Companys Proxy
Statement for the 2000 Annual Meeting of Stockholders.
|
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
|
1.
|
Financial Statements (All
Financial Statements listed below are those of the Company and its
consolidated subsidiaries):
|
|
Report of Independent
Public AccountantsArthur Andersen LLP
|
|
Consolidated Balance Sheets
December 31, 1999 and 1998
|
|
Consolidated Statements of
Income for the Years Ended December 31, 1999, 1998 and 1997
|
|
Consolidated Statements of
Cash Flows for the Years Ended December 31, 1999, 1998 and
1997
|
|
Consolidated Statements of
Changes in Stockholders Equity for the Years Ended December 31,
1999, 1998 and 1997
|
|
Notes to Consolidated
Financial Statements
|
|
2.
|
Financial Statement
Schedules:
|
|
Schedules are omitted
because they are not applicable or because the required information
appears in the financial statements or the notes thereto.
|
|
Any shareholder who would
like a copy of the following Exhibits may obtain one upon request from the
Company at a charge that reflects the reproduction cost of such Exhibits.
Requests should be made to the Corporate Secretary, Heller Financial,
Inc., 500 W. Monroe St., Chicago, IL 60661.
|
|
|
|
|
|
(3)(a) |
|
Amended and Restated
Certificate of Incorporation of the Company, as amended and
restated on April 30, 1998, is incorporated by reference to Exhibit 3.1 to
the Companys
Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No.
1-6157). |
|
|
|
(3)(b) |
|
Amended and Restated
By-laws of the Company, adopted on April 27, 1998, are
incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-
Q for the period ended March 31, 1998 (File No. 1-6157). |
|
|
|
(4)(a) |
|
Certificate of
Designation, Preferences and Rights of Cumulative Perpetual Senior
Preferred Stock, Series A, as filed with the Delaware Secretary of State on
September 16,
1992, is incorporated by reference to Exhibit 4(a) to the Companys
Annual Report on
Form 10-K for the Fiscal Year ended December 31, 1992 (File No.
1-6157). |
|
|
|
(4)(b) |
|
Certificate of
Designation, Preferences and Rights of the Companys Fixed Rate
Noncumulative Perpetual Senior Preferred Stock, Series C (Liquidation
Preference
$100.00 Per Share) filed with the Secretary of State of Delaware on November
5, 1997, is
incorporated by reference to Exhibit 4.4 to the Companys Registration
Statement on
Form S-4 dated October 24, 1997 (File No. 333-38627). |
|
|
|
|
|
|
|
|
(4)(c) |
|
Certificate of Designation,
Preferences and Rights of the Companys Fixed Rate
Noncumulative Perpetual Senior Preferred Stock, Series D (Liquidation
Preference
$100.00 Per Share), filed with the Secretary of State of Delaware on December
3, 1998 is
incorporated by reference to Exhibit (4)(c) to the Companys Annual
Report on Form 10-
K for the Fiscal Year ended December 31, 1998, as amended on Form 10-K/A
(File No.
1-6157). |
|
|
|
(4)(d) |
|
Heller Financial, Inc.
Standard Multiple-Series Indenture Provisions dated February 5,
1987 are incorporated by reference to Exhibit (4)(a) to the Companys
Registration
Statement on Form S-3 dated February 5, 1987 (File No. 33-11757). |
|
|
|
(4)(e) |
|
Form of Indenture dated as
of February 5, 1987 between the Company and Chemical
Bank, Trustee, with respect to Senior Securities is incorporated by reference
to Exhibit
(4)(c) to the Companys Registration Statement on Form S-3 dated
February 5, 1987 (File
No. 33-11757). |
|
|
|
(4)(f) |
|
First Supplemental
Indenture dated as of December 1, 1989 to the Indenture dated as of
February 5, 1987 between the Company and Chemical Bank, as Trustee, is
incorporated
by reference to Exhibit (4)(e) to the Companys Annual Report on Form
10-K for the
Fiscal Year ended December 31, 1994 (File No. 1-6157). |
|
|
|
(4)(g) |
|
Indenture dated as of
September 1, 1995 between the Company and State Street Bank and
Trust Company, as successor to Shawmut Bank Connecticut, National
Association, as
Trustee, with respect to Senior Securities is incorporated by reference to
Exhibit 4.3 to the
Companys Registration Statement on Form S-3 dated October 23, 1997
(File No. 333-
38545). |
|
|
|
|
|
|
|
(4)(h) |
|
First Supplemental
Indenture dated as of October 13, 1995, to the Indenture dated as of
September 1, 1995, between the Company and State Street Bank and Trust
Company, as
successor to Shawmut Bank Connecticut, National Association, as Trustee, with
respect to
Senior Securities is incorporated by reference to an exhibit to the Company
s Current
Report on Form 8-K, filed October 18, 1995 (File No. 1-6157). |
|
|
|
(4)(i) |
|
Second Supplemental
Indenture dated November 17, 1997 to the Indenture dated
September 1, 1995 between the Company and State Street Bank and Trust
Company, as
Trustee, with respect to Senior Securities is incorporated by reference to
Exhibit 4(a) to
the Companys Current Report on Form 8-K filed December 4, 1997 (File
No. 1-6157). |
|
|
|
(4)(j) |
|
Third Supplemental
Indenture dated as of August 16, 1999 to the Indenture dated
September 1, 1995 between the Company and State Street Bank and Trust
Company, as
Trustee, with respect to Senior Securities is incorporated by reference to
Exhibit 4 to the
Companys Quarterly Report on Form 10-Q for the period ended September
30, 1999
(File No. 1-6157). |
|
|
|
(4)(k) |
|
Indenture dated as of
September 1, 1995 between the Company and State Street Bank and
Trust Company, as successor to Shawmut Bank Connecticut, National
Association, as
Trustee, with respect to Subordinated Securities is incorporated by reference
to Exhibit
4.5 to the Companys Registration Statement on Form S-3 dated October
23, 1997 (File
No. 333-38545). |
|
|
|
(4)(l) |
|
First Supplemental
Indenture dated as of October 13, 1995, to the Indenture dated as of
September 1, 1995, between the Company and State Street Bank and Trust
Company, as
successor to Shawmut Bank Connecticut, National Association, as Trustee, with
respect to
Subordinated Securities is incorporated by reference to an exhibit to the
Companys
Current Report on Form 8-K, filed October 18, 1995 (File No.
1-6157). |
|
|
(4)(m) |
|
Indenture dated as of
September 1, 1995 between the Company and State Street Bank and
Trust Company, as successor to Shawmut Bank Connecticut, National
Association, as
Trustee, with respect to Junior Subordinated Securities is incorporated by
reference to
Exhibit 4.7 to the Companys Registration Statement on Form S-3 dated
October 23, 1997
(File No. 333-38545). |
|
|
|
(4)(n) |
|
First Supplemental
Indenture dated October 13, 1995 to the Indenture dated as of
September 1, 1995 between the Company and State Street Bank and Trust
Company, as
successor to Shawmut Bank Connecticut, National Association, as Trustee, with
respect to
Junior Subordinated Securities is incorporated by reference to Exhibit
4(d)(i) to the
Companys Current Report on Form 8-K filed October 18, 1995 (File No.
1-6157). |
|
|
|
(4)(o) |
|
Form of Medium-Term Note,
Series J (Fixed Rate) due from 9 months to 30 years from
date of issue is incorporated by reference to Exhibit 4(a) to the Company
s Current
Report on Form 8-K filed October 6, 1999 (File No. 1-6157). |
|
|
|
(4)(p) |
|
Form of Medium-Term Note,
Series J (Fixed Rate/Currency Indexed) due from 9 months
to 30 years from date of issue is incorporated by reference to Exhibit 4(b)
to the
Companys Current Report on Form 8-K filed October 6, 1999 (File No.
1-6157). |
|
|
|
(4)(q) |
|
Form of Medium-Term Note,
Series J (Floating Rate) due from 9 months to 30 years
from date of issue filed as Exhibit 4(c) to the Companys Current Report
on Form 8-K
filed October 6, 1999 (File No. 1-6157). |
|
|
|
(4)(r) |
|
Form of Medium-Term Note,
Series J (Floating Rate/Currency Indexed) due from 9
months to 30 years from date of issue is incorporated by reference to Exhibit
4(d) to the
Companys Current Report on Form 8-K filed October 6, 1999 (File No.
1-6157). |
|
|
|
|
|
|
|
(10)(a) |
|
Amended and Restated Keep
Well Agreement between The Fuji Bank, Limited (Fuji
Bank) and the Company, as amended, is incorporated by reference to
Exhibit 4.13 to the
Companys Registration Statement on Form S-3 dated July 8, 1998 (File
No. 333-58723). |
|
|
|
(10)(b) |
|
Registration Rights
Agreement dated May 6, 1998 between the Company and Fuji Bank
is incorporated by reference to Exhibit (10)(b) to the Companys Annual
Report on Form
10-K for the Year Ended December 31, 1998, as amended on Form 10-K/A (File
No. 1-
6157). |
|
|
|
(10)(c) |
|
Services Agreement dated
January 1, 1985 between the Company and Fuji Bank is
incorporated by reference to Exhibit (10)(e) to the Companys Annual
Report on Form
10-K for the Fiscal Year ended December 31, 1992 (File No. 1-6157).
|
|
|
|
(10)(d) |
|
Management Services
Agreement dated as of January 2, 1998 between Fuji America
Holdings, Inc. (FAHI) and the Company is incorporated by reference to
Exhibit 10(d) to
the Companys Annual Report on Form 10-K for the Fiscal Year ended
December 31,
1997, as amended on Form 10-K/A (File No. 1-6157). |
|
|
|
(10)(e) |
|
Agreement for the
Allocation of Federal Income Tax Liability and Benefits among FAHI
and the Company, effective as of January 2, 1998, incorporated by reference
to the
Companys Annual Report on Form 10-K for the Fiscal Year ended December
31, 1998,
as amended on Form 10-K/A (File No. 1-6157). |
|
|
|
(10)(f) |
|
1997-1999 Long Term
Incentive Plan, effective January 1, 1997, is incorporated by
reference to Exhibit 10(i) to the Companys Annual Report on Form 10-K
for the Fiscal
Year ended December 31, 1997, as amended on Form 10-K/A (File No. 1-6157).
|
|
|
(10)(g) |
|
Supplemental Executive
Retirement Benefit Plan, amended and restated effective January
1, 1996, is incorporated by reference to Exhibit (10)(e) to the Company
s Annual Report
on Form 10-K for the Fiscal Year ended December 31, 1996 (File No.
1-6157). |
|
|
|
(10)(h) |
|
First Amendment to the
Companys Supplemental Executive Retirement Plan, effective as
of January 1, 1999, is incorporated by reference to the Companys
Quarterly Report on
Form 10-Q for the period ended September 30, 1999 (File No.
1-6157). |
|
|
|
(10)(i) |
|
1998 Heller Financial, Inc.
Stock Incentive Plan is incorporated by reference to Exhibit
10.1 to the Companys Registration Statement on Form S-2 initially filed
on February 26,
1998, as amended (File No. 333-46915). |
|
|
|
(10)(j) |
|
Amended and Restated
Executive Deferred Compensation Plan, effective as of January 1,
1998, is incorporated by reference to Exhibit 10 to the Companys
Quarterly Report on
Form 10-Q for the period ended September 30, 1998 (File No.
1-6157). |
|
|
|
(10)(k) |
|
First Amendment to Amended
and Restated Executive Deferred Compensation Plan dated
March 2, 1999 is incorporated by reference to the Companys Annual
Report on Form
10-K for the Fiscal Year ended December 31, 1998, as amended on Form 10-K/A
(File
No. 1-6157). |
|
|
|
(10)(l)* |
|
Second Amendment to Amended
and Restated Executive Deferred Compensation Plan
dated November 16, 1999. |
|
|
|
(10)(m)* |
|
Employment Letter
Agreement, dated as of December 31, 1999, between the Company
and Richard J. Almeida. |
|
|
|
(10)(n)* |
|
Employment Letter
Agreement, dated as of December 31, 1999, between the Company
and Frederick E. Wolfert. |
|
|
|
|
|
|
|
(10)(o) |
|
Form of Change in Control
Agreement is incorporated by reference to Exhibit 10.32 to
the Companys Registration Statement on Form S-2 initially filed on
February 26, 1998,
as amended (File No. 333-46915). |
|
|
|
(12)* |
|
Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends |
|
|
|
(21)* |
|
Subsidiaries of the
Registrant |
|
|
|
(23)* |
|
Consent of Independent
Public Accountants |
|
|
|
(27)* |
|
Financial Data
Schedule |
|
|
|
Management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
Form 10-K.
|
Instruments defining the rights of holders of certain issues of
long-term debt of the Company have not been filed as exhibits to this Report
because the authorized principal amount of any one of such issues does not
exceed 10% of the total assets of the Company. The Company hereby agrees to
furnish to the Securities and Exchange Commission, upon request, a copy of
each instrument that defines the rights of holders of the Companys
long-term debt.
(b) Current Reports on Form 8-K:
Date of Report
|
|
Item
|
|
Description
|
October 5, 1999 |
|
5, 7 |
|
A report filing a press
release announcing that the Company agreed to sell
its domestic factoring business, known as Commercial Services, to The CIT
Group. |
|
|
October 6, 1999 |
|
5, 7 |
|
A report announcing that
the Company commenced an offering on
Registration Statement on Form S-3 No. 333-84725 of up to
$10,000,000,000 of Medium Term Notes, Series J, due from 9 months to
30 years from the date of issue. |
|
|
October 18, 1999 |
|
5, 7 |
|
A report filing press
releases announcing (i) the increase of the quarterly
dividend on the Companys Class A and Class B common stock to $.10 per
share from $.09 per share, (ii) the declaration of dividends on three of the
Companys preferred stocks and (iii) the authorization to repurchase up
to
two million shares of the Companys Class A Common Stock to provide
stock for issuance under the Companys stock option and restricted stock
plans, as well as for other corporate purposes. |
|
|
October 20, 1999 |
|
5, 7 |
|
A report filing a press
release announcing earnings for the quarter ending
September 30, 1999. |
|
|
January 20, 2000 |
|
5,7 |
|
A report filing a press
release announcing (i) earnings for the year ending
December 31, 1999, (ii) selection by the Board of Directors of May 4, 2000
as the date for the Annual Meeting of Stockholders, and (iii) selection by
the Board of Directors of March 10, 2000 as the record date for voting at
the Annual Meeting of Stockholders. |
|
|
January 20, 2000 |
|
5,7 |
|
A report filing a press
release announcing the declaration of dividends on
the Companys common and preferred stocks. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized
on this 22nd day of February, 2000.
|
Chairman and Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed by the following persons on behalf of the
registrant in their capacities and on the date indicated.
Signature
|
|
Title
|
|
Date
|
/S
/ RICHARD
J. ALMEIDA
Richard J. Almeida
|
|
Chairman and Chief
Executive Officer |
|
February 22, 2000 |
|
|
/S
/ LAWRENCE
G. HUND
Lawrence G. Hund
|
|
Executive Vice President,
Controller and Chief
Accounting Officer |
|
February 18, 2000 |
|
|
/S
/ LAURALEE
E. MARTIN
Lauralee E. Martin
|
|
Executive Vice President and
Chief Financial Officer |
|
February 22, 2000 |
|
|
/S
/ FREDERICK
E. WOLFERT
Frederick E. Wolfert
|
|
Director, President and Chief
Operating Officer |
|
February 22, 2000 |
|
|
/S
/ MICHAEL
A. CONWAY
Michael A. Conway
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ SOICHI
HIRABAYASHI
Soichi Hirabayashi
|
|
Director |
|
February 23, 2000 |
|
|
/S
/ TAKAAKI
KATO
Takaaki Kato
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ MARK
KESSEL
Mark Kessel
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ TETSUO
KUMON
Tetsuo Kumon
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ DENNIS
P. LOCKHART
Dennis P. Lockhart
|
|
Director and Executive Vice
President |
|
February 22, 2000 |
|
|
/S
/ TAKASHI
MAKIMOTO
Takashi Makimoto
|
|
Director |
|
February 23, 2000 |
|
Signature
|
|
Title
|
|
Date
|
/S
/ FRANK
S. PTAK
Frank S. Ptak
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ MASAHIRO
SAWADA
Masahiro Sawada
|
|
Director |
|
February 22, 2000 |
|
|
/S
/ KENICHIRO
TANAKA
Kenichiro Tanaka
|
|
Director |
|
February 22, 2000 |
HFI 1999 XX 10-K